SPH REIT - Record Breaking Quarter
- 1Q17 achieved record Revenue and Net Property Income.
- DPU flat y-o-y at 1.34Scts after 6% retention.
- Likely to start paying management fees partially in cash from next quarter.
- Stable outlook with minimal debt or leases due.
Stock is fairly priced.
- We currently have a HOLD recommendation, with TP of S$1.00.
- SPH REIT's dividend yield above 5.5% reflects the strength of its assets and stability of earnings. However, at this point we believe that comparable retail S-REITs offer more attractive yields.
Paragon to continue to drive earnings growth.
- We believe that Paragon will continue to outperform the rest of Orchard Road for both retail and office assets, due to its
- location and frontage in the prime Orchard Road shopping district, as well as
- proximity to the Mount Elizabeth medical cluster.
- At Clementi Mall, more than 30% of lease expiring in FY17 could set a new base for rents.
Potential acquisition a catalyst.
- With a healthy gearing of c.26.0% and cost of debt of c.2.8%, SPH REIT is well poised for debt-funded acquisitions.
- The next growth catalyst for the REIT will be the acquisition of the Sponsor’s 70% stake in Seletar Mall. However, we believe this acquisition is likely to be more of a medium term prospect, as the mall was only completed in December 2014 and is still on its first lease cycle.
- We have a DCF-backed target price of S$1.00, implying a dividend yield of 5.9-6.0% for FY17F-18F.
- Due to the lack of near-term catalysts and limited upside to TP, we maintain our HOLD call.
Key Risks to Our View
- Short WALE due to lease expirations at Clementi Mall. The portfolio has a relatively short Weighted Average Lease Expiry (WALE) of 2.5 years by net lettable area (NLA). Around 12.2% or 111,000 sf of portfolio NLA will expire in FY17. The majority comes from Clementi Mall where more than 30% or c.72,000 sqft of the mall’s NLA are due in the next nine months.