K-Reit

CIMB Research on 26 June 2012

WE are net positive on K-Reit's acquisition of another 12.4 per cent in Ocean Financial Centre (OFC), with increased control and good placement price outweighing slight negatives from higher asset leverage. The placement price of S$1.17 (15 per cent premium to volume- weighted average price) could provide a benchmark for the share price.

We raise our distribution per unit estimates and dividend-discount-model-based target price (discount rate: 8.2 per cent), factoring in accretion from the purchase. Maintain "outperform" on favourable risk-reward. We see catalysts from an earlier bottoming of the office market and tax savings.

K-Reit announced the acquisition of an additional 12.4 per cent stake in OFC for S$261.6 million (S$2,380 psf) or S$285.7 million ($2,606 psf) including S$24.1 million in income support till December 2017 from Avan Investments.

This acquisition will take its stake in OFC to 99.9 per cent. The equity cost of S$228 million will be funded by a mix of debt (S$158.2 million) and equity (S$70.2 million private placement at S$1.17 apiece to Ong Holdings, 14.6 per cent premium to VWAP of S$1.02, though still below NAV at 0.9 times P/B).

Overall acquisition price and terms were fairly similar to that for K-Reit's acquisition of its initial 87.5 per cent stake back in October 2011. Slight difference came from a lower support quarterly net property income of S$27.6 million (previous quarter: S$30.5 million) and rental of S$13-S$14 psf.

Positives came from increased control and stake in the asset and premium on the placement price (which could set a target/support for share price).

We understand that K-Reit had approached the vendor for the purchase who apparently paid a premium to VWAP due to his confidence in K-Reit. Slight negatives, however, came from a fairly high aggregate leverage of 43.9 per cent (previously 41.8 per cent) after the deal.

Overall, we are net positive on the deal, as we see advantages from increased control in OFC and good placement price, outweighing slight negatives from higher asset leverage.

OUTPERFORM