KREIT – UOBKH

Penalised by illogical sell down

K-REIT Asia’s stock price has corrected 53.1% from S$2.94 to S$1.38 since announcing the proposed acquisition of One Raffles Quay (ORQ) on 30 Jul 07. The correction was due K-REIT’s high gearing post acquisition of ORQ and a freeze in the credit market.

Acquisition of One Raffles Quay. K-REIT completed the acquisition of onethird stake in ORQ from Keppel Land for S$941.5m on 10 Dec 07. The maiden acquisition more than double K-REIT’s portfolio size from S$0.8b to S$1.8b and increased net lettable area for office space from 0.8m sf to 1.2m sf. The acquisition strengthened K-REIT’s positioning as an office-focused commercial REIT. The acquisition was funded by a bridging loan of S$942m from Kephinance Investment, a subsidiary of Keppel Corporation. The acquisition raised K-REIT’s gearing to 57.3% at Dec 07.

Proposing a rights issue. K-REIT Asia has proposed a renounceable rights issue of up to 420m units. The rights units will be priced at a discount of up to 20% to prevailing market price. Keppel Corporation and sponsor Keppel Land own 72.7% of K-REIT in aggregate. Both Keppel Corporation and Keppel Land has given irrevocable undertaking to take up their respective allocations of rights units. Both companies will also make excess applications for excess rights units which are not subscribed. The limit of 420m rights units was put in place to ensure at least 10% of total number of issued units is held by the public after the rights issue.

Reiterate BUY. We have revised our forecast and valuation for K-REIT based on the following assumptions:

• 372.1m new units were issued at S$1.20 each in a 3-for-2 rights issue,
• net proceeds of S$445.5m utilised to partially repay bridging loan from Kephinance Investment,
• the balance bridging loan of S$496.5m is refinanced at interest cost of 3.5%, and
• the rights issue is completed on 1 Jul 08.

K-REIT provides FY08 distribution yield of 8.29%, a huge spread of 6.25% over 10-year Singapore government bond yield at 2.04%. Our target price is S$1.96 based on 2-stage dividend discount model. The rights issue will reduce book NAV from S$3.78 to S$2.16 per share, which is still much higher than current market price. We also estimate that gearing will be reduced to 34.7% after completion of the rights issue.