Brokers' Call: Soilbuild Business Space Reit

Soilbuild Business Space Reit | Buy

Target price: 69 cents

July 18 close: 65 cents

Broker: OCBC Investment Research, July 18

Soilbuild Business Space Reit's (Soilbuild Reit) Q2 FY18 results were within expectations, with H1 FY18 net property income dropping 12.4 per cent year-on-year to $33.2 million, or 50 per cent of our initial full-year forecast. H1 FY18 distribution per unit dropped a corresponding 12.4 per cent year-on-year to 2.588 cents, or 50.8 per cent of our initial full-year forecast.

We see signs of stabilisation on a quarter-on-quarter basis - Q2 FY18 net property income fell 4.4 per cent quarter-on-quarter and this was mainly due to the divestment of KTL Offshore in February. The portfolio occupancy rate remains steady at 87.6 per cent.

Since our upgrade from "hold" to "buy" on March 29, Soilbuild Reit has posted total returns of 2.8 per cent versus the FTSE Straits Times Real Estate Investment Trust Index's 1 per cent. We expect the industrial space to remain challenging for most of 2018, but take comfort in that only 9.6 per cent gross rental income is due for renewal (including underlying tenants at Solaris) for the rest of the year.


Keppel DC Reit | Buy

Target price: $1.52

July 18 close: $1.39

Broker: DBS Group Research, July 18

Trading at a yield of about 5.6 per cent, Keppel DC Reit (KDC Reit) remains one of the few Reits in Singapore that can make accretive acquisitions, supported by low cost of capital.

The Reit is projected to deliver a solid 3 per cent compound annual growth rate in distributions, supported by ambitious growth plans. Our target price of $1.52 is the highest in the street. Our estimates are conservative compared to consensus, after pricing in the recent acquisition of a 99 per cent interest in Kingsland Data Centre (KDC SGP 5) and fund raising. Our numbers could be raised by a further 3 per cent if the manager achieves tax transparency status for its stake in KDC SGP 5, which we have not priced in.

Q2 FY18 results were in line with expectations, coupled with a sustained portfolio occupancy of about 92 per cent. With limited expiries over the coming two financial years, there is high income visibility. A pick-up in occupancies and rental reversionary prospects turning positive could help lift our earnings estimates.


Oversea-Chinese Banking Corporation | Buy

Target price: $13.52

July 19 close: $11.25

Broker: UOB Kay Hian, July 19

We expect OCBC to register a healthy loan growth of 10 per cent year-on-year and wealth management fees to grow 20.9 per cent year-on-year with steady expansion of assets under management in Q2 FY18.

However, investors could be disappointed with an expected second consecutive quarter of flattish net interest margin (we anticipate net interest margin expansion to resume in H2 FY18) and a moderation in contribution from insurance due to a correction in the bond market.

We cut our net profit forecast for 2018 by 13.5 per cent to $4.36 billion as it is uncertain whether the planned initial public offering for Great Eastern Life Assurance (Malaysia) would proceed. The Malaysian government is expected to conduct a review of the directive for foreign insurers to reduce their stakes in local insurance subsidiaries in Malaysia to 70 per cent or below.

Management seeks to improve dividend payout ratio by reinstating its dividend scheme.


First Real Estate Investment Trust | Hold

Target price: $1.34

July 19 close: $1.32

Broker: OCBC Investment Research, July 19

First Reit's (FREIT) Q2 FY18 scorecard was within our expectations. Gross revenue increased 5.3 per cent year-on-year to $28.9 million, while Q2 FY18 distribution per unit inched up 0.5 per cent to 2.15 cents, forming 24.6 per cent of our full-year forecast. We believe that 2018 should still see at least one acquisition being made, with the ticket size of any acquisition being in the $20 million to $30 million range.

Separately, FREIT's sponsor, PT Lippo Karawaci (LK), has outlined plans for the next six months to bolster the liquidity of the company, such as the sale of unsold inventory and the company's Puri Mall asset.

While we were cautiously optimistic that levers such as the Puri Mall sale would be sufficient for liquidity needs, there has been increasing market talk about the possibility of LK divesting its stake in FREIT. Should a substantial divestment come to pass, a number of questions need to be answered, the main one being the likelihood of LK renewing its master leases, which will start expiring from 2021.

A version of this article appeared in the print edition of The Straits Times on July 23, 2018, with the headline 'Brokers' Call: Soilbuild Business Space Reit'. Print Edition | Subscribe