Keppel REIT - Young, Modern, and Strategically located Office Porfolio

BUY on attractive valuations
K-REIT's share price performance has lagged other large cap S-REIT peers in  recent months, and we believe it is time to play catch-up as fears of a  drop in DPU is already priced in. We have a BUY recommendation on K-REIT,  with TP of S$1.12.

Modern portfolio should weather office supply wave well
While there will be more supply in 2016-2017, we believe that K-REIT's  asset portfolio, which comprises some of the most sought-after properties  in Singapore will be resilient. In addition, earnings should be shielded to  an extent by a long lease expiry profile - 70% of its NLA will only be  renewed from 2017.

MBFC acquisition to mitigate expiry of OFC income support
With the expiry of income support at Ocean Financial Centre (OFC) in 1Q15  and the divestment of Prudential Tower in 3Q14, we have forecasted a 9%  decline in DPU in FY15. The decline is partly mitigated by contribution  from the recently acquired MBFC Tower 3, although we expect earnings to be  flat in FY15-16.

Technical Analysis
Daily Chart
Valuation:
Our target price of S$1.12 is based on the discounted cash flow (DCF)  model, as K-REIT generates recurring rental income from its tenants. At its  current price, K-REIT offers investors a dividend yield of 7.1% for FY16F.  We have a BUY recommendation.

Key Risks to Our View:
Shadow space could limit rental growth.  Close to 50% of KREIT's leases are from the banking, insurance, and  financial sectors. As financial institutions are generally shrinking their  footprint, shadow space could be a problem if the Manager is unable to find  new tenants to replace them. (Read Report)

Source : DBS Group Research

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