Keppel REIT replaces Olam Group in STI reserve list

The change was reflected in the benchmark index' s quarterly review on Aug 31.
https://www.theedgesingapore.com/news/company-news/keppel-reit-replaces-olam-group-sti-reserve-list
 

 

The move could endear Keppel Corp to investors and help it achieve its ambitious FUM growth targets

 

HELPED by a S$3.3 billion disposal gain from divesting its offshore and marine business, posted a record net profit for H1 2023 of over S$3.6 billion.

 

Keppel Corp paid its shareholders an interim cash dividend of S$0.15 per share on Aug 18. The group has also proposed paying a dividend in specie (DIS) of one (KReit) unit for every five Keppel Corp shares held.

 

Post the proposed distribution of 9.4 per cent of KReit, Keppel Corp will remain as KReit&rsquo s largest unitholder, with a stake of about 37.1 per cent. The trust is managed by a subsidiary of Keppel Corp&rsquo s asset management arm, Keppel Capital Holdings.

 

KReit&rsquo s unit price fell immediately post the announcement of the proposed DIS. Perhaps the trust faces selling pressure from some Keppel Corp shareholders who are keen to quickly offload KReit units they receive. 

 

As an existing investor in both Keppel Corp and KReit, I am happy to get more units in KReit via the proposed DIS. 

 

The proposed DIS will grow KReit&rsquo s investor base and raise the trust&rsquo s public float, thereby improving its trading liquidity. With improved liquidity, KReit&rsquo s units might trade better.    

 

Book value discount

However, the buying back and cancelling of 19.65 million units of KReit in H1, together with the move to raise its free float, may not rectify KReit&rsquo s large discount to book value.

 

Despite owning high-quality commercial assets in Singapore, Australia, South Korea and Japan, KReit traded at a 36 per cent discount to its net asset value (NAV) of S$1.34 as at end-June, based on the unit price as at Aug 22. 

 

Meanwhile, trusts owning commercial assets such as (CICT) and (MPACT) traded at narrower discounts to end-June NAV of under 15 per cent, based on unit prices as at Aug 22.

 

KReit&rsquo s S$9.2 billion commercial property portfolio as at end-June is smaller than the portfolios of CICT and MPACT. Unlike KReit, the latter two are members of the benchmark Straits Times Index. 

 

Perhaps KReit should merge with either CICT or MPACT. KReit&rsquo s unitholders can swap their KReit units for units in an enlarged CICT or MPACT, which may trade at a superior book value multiple versus KReit. 

 

But Keppel Corp could be loath to support a merger involving KReit that sees it lose fund management revenue from managing the trust. Such fee income is recurrent in nature and the profit margin can be good. 

 

Fund management ambitions

Keppel Corp is laser-focused to grow its funds under management (FUM) &ndash S$53.2 billion as at end-June, of which 62 per cent is tied to real estate &ndash to S$100 billion by 2026 and S$200 billion by 2030.

 

To achieve ambitious FUM growth targets, an area that Keppel Corp needs to excel in is raising funds from investors. Perhaps Keppel Corp can impress potential investors by showing it is proactive in addressing a situation where a listed trust trades poorly, as is the case with KReit.

 

Provided KReit&rsquo s book value is robust, Keppel Corp can work with partners in a private fund to privatise KReit based on an offer price of around the trust&rsquo s NAV. 

 

Private fund investors may like KReit&rsquo s assets.

 

Around 79 per cent of KReit&rsquo s portfolio are Singapore assets &ndash mainly Grade A office buildings. The Singapore assets comprise 79.9 per cent of Ocean Financial Centre in Raffles Place, one-third of Marina Bay Financial Centre, one-third of One Raffles Quay and 100 per cent of Keppel Bay Tower in the HarbourFront area. 

 

These Singapore properties enjoyed occupancy rates of between 98 per cent and 100 per cent as at end-June. Each of the properties saw net property income in H1 rise year on year. And the valuation of KReit&rsquo s Singapore portfolio as at end-June inched up from six months ago.  

 

All KReit&rsquo s Singapore office assets have maintained Building and Construction Authority Green Mark Platinum certification.

 

High-quality centrally-located office buildings here can be competitive in securing tenants due to Singapore&rsquo s ability to draw businesses from diverse sectors as well as flight to quality among businesses who are fighting for talent. Also, staff in many businesses in Singapore are spending large amounts of time working from physical offices.

 

Capital values of premier office towers in Singapore are supported by institutions and super-wealthy families seeking safe-haven assets in gateway cities. 

 

If interest rates peak and then soften, capital values of investment properties can get a boost. As at Aug 21, the 10-year Singapore government bond yield was about 3.2 per cent per annum, versus around 3.5 per cent in early November 2022. 

 

Since KReit&rsquo s listing in 2006, its manager has actively rejigged the trust&rsquo s portfolio via acquisitions and divestments. Unitholders can draw assurance from the manager&rsquo s focus on driving individual asset performance with proactive leasing and cost-management strategies. The trust&rsquo s debt maturity is well-spread out, and about 76 per cent of borrowings are on fixed rates as at end-June. 

 

Still, KReit is unloved by the market. In contrast, stable-mate , which focuses on data centres, trades well above book value.

 

To wow potential investors, Keppel Corp needs to have its listed trusts trade like Keppel DC Reit and not like KReit. Resolving KReit&rsquo s undervaluation can help Keppel Corp in growing its FUM and getting investors to give Keppel Corp a better valuation.