Brokers' Call

KEPPEL DC REIT

Broker: OCBC Investment Research

Call: Buy

Target Price: $1.24

Keppel met expectations in its fourth-quarter results for last year but its distribution per unit of 1.64 cents came in slightly above management's initial public offering forecast by 1.9 per cent.

However, gross revenue of $24.8 million was 2.1 per cent below its projection, due to lower variable rental income from Singapore and depreciation of foreign currencies against the Singapore dollar.

For financial year 2016, Keppel DC Reit has 11.8 per cent of its leases expiring. The bulk of this is accounted for by two major leases. One tenant at one of its Singapore properties has agreed to a renewal of another five years.

But the other tenant has decided to downsize its take-up at Citadel 100 Data Centre from 27,000 sq ft to 10,000 sq ft in the first quarter of this year. This would result in the asset's occupancy dropping to 52 per cent. The resulting revenue decline may not have a material impact on its distributable income. It would also actively seek to find a replacement.


CAPITALAND COMMERCIAL TRUST (CCT)

Broker: DBS Group Research

Call: Buy

Target Price: $1.33

CCT has maintained a defensive leasing strategy amid stiff competition for larger tenants by locking in longer-term leases for most of its top 10 tenants. With more than 70 per cent of office leases expiring in financial year 2018 and beyond, CCT offers investors a measure of earnings stability and certainty amid record office completions over the next two years.

Earnings risk near term is also mitigated by the fact that the average rent of leases expiring this year of $9.57 per square foot is below current spot rents.

With gearing standing at only 30 per cent, the lowest among Singapore office Reits, there is potential upside to our distribution per unit estimates if CCT triggers the option to purchase the remaining 60 per cent stake in CapitaGreen that it does not own.

Higher vacancies and negative rental reversions are key risks.


SINGAPORE EXCHANGE

Broker: DBS Group Research

Call: Buy

Target Price: $7.80Singapore Exchange's net profit for the second quarter of its financial year ending June 2016 came in at $84 million. Profits for the first half rose 11 per cent year-on-year to $183 million.

SGX successfully launched a number of new initiatives in the second quarter, including SGX Bond Pro. The results of these initiatives would be visible only over the medium to long term.

The management has guided for lower operating expenses of between $415 million and $425 million for the year while technology-related capital expenditure is also lower at $70 million to $75 million.

The outlook for the Securities and Derivatives markets remains challenging.

Volatility in the Chinese market, fear of a global recession, slumping oil prices and currency wars continue to weigh on sentiment.


SEMBCORP INDUSTRIES

Broker: CIMB

Call: Buy

Target Price: $3.85

Reports have made the rounds that SembCorp Industries (SCI) would inject funds into rig-builder SembCorp Marine (SMM) or buy full control to shore up finances strained by a collapse in oil prices.

Privatisation would be a negative move for SCI, the parent company, as it will strain its own balance sheet and cap the growth potential of utilities.

The uncertainty that surrounds the bankruptcy and potential impairment charges for Sete Brasil rigs, a client of SMM, could be the biggest deterrent to SCI taking SMM private.

As of September last year, 60 per cent of SCI's utilities earnings were from its overseas assets that the group invested in over the past decade.

Its gross debt was $6.2 billion, comprising $3.4 billion of project finance and corporate debt, and $2.8 billion from SMM.

Group net debt stood at $4.5 billion.

Assuming zero dividend from SMM, SCI's dividend per share for financial year 2015 may be cut to 11 cents.

Potential re-rating catalysts are stronger-than-expected earnings from utilities and partial settlement of payment from Sete Brasil to SMM.

A version of this article appeared in the print edition of The Straits Times on January 25, 2016, with the headline 'Brokers' Call'. Print Edition | Subscribe