SPH REIT - DBS Research 2017-01-12: Record Breaking Quarter

SPH REIT - DBS Vickers 2017-01-12: Record Breaking Quarter SPH REIT SK6U.SI

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 
    1. location and frontage in the prime Orchard Road shopping district, as well as 
    2. proximity to the Mount Elizabeth medical cluster. 
    As such, we assume reversions of 3.5-4.0% for Paragon. A link bridge connecting Cairnhill redevelopment and Paragon was opened in Nov 2016, and could draw new traffic to the mall. 
  • 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.


Valuation

  • 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.




Singapore Research Team DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2017-01-12
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.000 Same 1.000



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