SPH REIT - DBS Research 2017-03-16: Get Ready (before it's too late)

SPH REIT - DBS Vickers 2017-03-16: Get Ready (before it's too late) SPH REIT SK6U.SI

SPH REIT - Get Ready (before it's too late)

  • Opportune time to acquire The Seletar Mall within next six months prior to first renewal cycle.
  • Market have not priced in upside from a potentially value accretive deal.
  • Assumed both equity and debt fundraising still results in improved distributions and liquidity.
  • Upgrade to BUY with total return exceeding 13%.



Upgrade to BUY, TP raised to S$1.03. 

  • We believe that it is an opportune time for SPH REIT to consider acquiring The Seletar Mall from its Sponsor, most ideally within the next six months prior to the asset undergoing its first renewal cycle at the end of 2017 as we see upside to rents. 
  • We believe that this deal will reaccelerate SPH REIT's growth profile in the medium term and market will be supportive of this deal. 
  • Imputing the acquisition in our forecasts, our TP is increased by 3% to S$1.03.


Upside from acquisition not priced in yet. 

  • Following the potential acquisition of Seletar Mall (c.S$500m), we estimate a 3-4% rise in DPUs on the assumption of an optimal funding scenario which involve a partial equity fund raising of S$200m. 
  • Post the acquisition, gearing will increase slightly from 26% to 31% but still conservative compared to average peer level of 34%. Most importantly, we see improved liquidity in the stock, which will be positive for stock prices.


Seletar Mall to drive higher growth. 

  • With Seletar Mall, we are positive that SPH REIT’s portfolio will see stronger performance in the medium term. SPH REIT will derive a higher proportion of its income from necessity shopping (rising from 20% to 32%), which adds to its diversity and resilience. 
  • Growth will derive from higher rents achieved at Seletar Mall once its leases rollover from FY18F which will enable SPH REIT to deliver a sustained growth in dividends.


Valuation

  • We increased our DCF-backed TP to S$1.03 from S$1.00 after incorporating the contributions from Seletar Mall from FY18, and the increase in gearing ratio to acquire the asset. 
  • The stock offers a dividend yield of around 6% and price upside potential of 7%. 
  • Upgrade to BUY.


Key Risks to Our View

  • Timing and price of the Seletar Mall acquisition. Later than projected acquisition of Seletar Mall could mean downside to accretion estimates.




Singapore Research Team DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2017-03-16
DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 1.03 Up 1.000



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