K-REIT – DBSV

Lifted by Australian income

• 1Q10’s distribution income up 14% yoy, in line

• Stronger 2H earnings fuelled by Australian contributions

• Upgrade to Hold with TP of $1.17

Lifted by Australian contributions. Kreit reported a set of in-line results. Distribution income rose 14% yoy to $17.8m (DPU: 1.33cts) on a 23% yoy improvement in revenue to $18.2m.

However, on a qoq basis, topline rose by a modest 7% thanks to the maiden $1.4m profit (1 month) from its Australian acquisition, completed in Mar 2010. In terms of its Spore assets, the group achieved a slight increase in occupancy to 96% while average portfolio passing rents inched up 1.3% qoq to $8.30psf/mth. Gearing remains healthy at 25.2%.

Earnings growth to be back-end loaded. Going forward, with the better than expected economic growth prospects, we view that office rents have reached a low and are likely to hover at the bottom until more of the new stock is digested. We expect K-reit’s earnings to be stronger in 2Q10 with the full impact of the Australian contributions as well as an expected reduction in withholding taxes in Australia from July this year. Furthermore, with majority of renewals and rent reviews due this year largely completed, the impact of negative reversions is likely to be felt from next year when 15.5% of its leases expire and another 10% due for review.

Upgrade to Hold. We have upgraded Kreit to Hold on the back of our more upbeat view on the office sector given the improved GDP performance. However, in terms of earnings, we have nudged FY10-11 DPU down by 5.5% and 2.9% respectively to account for changes in the non-tax deductible items, to adjust for the change in management fee payment mode from 100% units to 50/50 cash and units. K-reit’s share price had retraced from the recent peak and is currently trading at FY10/11 DPU yields of 6.1%/5.8% and 0.76x P/bk NAV. Our DCF-backed target price of $1.17 translates to an absolute return of 9%.