KREIT – UOBKH
No Surprises
1H07 net profit up 55.8% yoy, distributable income up 36.8%. K-REIT achieved a good set of results, with its Q2 property income increased 11.1% qoq to S$8.9m. Net profit increased 20.6% qoq to S$4.2m, resulting in a 55.8% yoy increase for the total 1H07 net profit of S$7.6m. The increase in rental income is mainly attributed to improved occupancies, and higher rental rates achieved for new and renewed leases. Property income saw the highest increase for Keppel Towers and GE Tower, of about an addition of S$0.88m over that of 1Q07 (S$3.68m). DPU rose 20.9% from 1.77 Scts in 1Q07 to 2.14 Scts (7.88 Scts on an annualized basis), reflecting a yoy increase of distributable income to S$9.5m in 1H07. Property expenses increased marginally due to higher property tax (consequent to improved occupancies), higher repair and maintenance costs as well as higher management fees.
Rental reversions and rising rental rates still key growth driver. K-REIT is well-positioned to capitalise on the rentals uptrend as it will see almost 70% (by NLA) of its office leases expire and due for renewal between now to end 2010. Blended portfolio occupancy has reached a high of 99.6%, limiting any upside through improvements in occupancy levels. Although management is currently reviewing any possible asset enhancement opportunities, we are cautious on the potential impact.
Earnings surprises from acquisitions. Any earnings surprises will come from acquisitions to hit K-REIT’s target portfolio of S$2.0b over the next few years, although it has not made any maiden acquisitions so far. Key risk, however, is the increasing difficulty in making yield accretive acquisitions, especially in the office segment where capital values and soaring. Having said that, we do not rule out the possibility of Keppel Land injecting its office assets into K-REIT.
Maintain BUY, target price S$3.39. We maintain BUY on K-REIT with a target price of S$3.39.The stock is currently trading at a yield of about 2.86%. In deriving our target price, we adopted DCF valuation using a WACC of 6.04% derived from a market risk premium of 6.5% and beta of 0.7, and a terminal growth rate of 2.0%. We also factored in conservative acquisitions of S$100-150m p.a. over the next few years.