OCBC Investment Research 2015-07-14: SPH REIT: Flat performance in 3QFY15. Maintain HOLD.

SPH REIT: Flat performance in 3QFY15 

  • 3QFY15 DPU flat YoY at 1.35 S cents 
  • Portfolio rental reversion of 9.2% 
  • Valuations appear fair 

3QFY15 DPU unchanged YoY 

  • SPH REIT recently reported a flattish set of 3QFY15 results, with DPU coming in unchanged on a YoY basis at 1.35 S cents, despite a mild 1.6% growth in gross revenue to S$51.2m. 
  • Paragon and The Clementi Mall both saw a stronger percentage increase in NPI than in gross revenue, underpinned by lower maintenance expenses and savings in utilities. 
  • For 9MFY15, SPH REIT’s revenue came in at S$154.3m (+2.1%), while DPU of 4.08 S cents represented an increase of 1%. The former and latter constituted 75% and 75.9% of our FY15 projections, respectively, and was within our expectations. 
  • YTD, management has retained S$2.1m of taxable income available for distribution. This would be distributed to unitholders in the future. 

Negative rental reversions at The Clementi Mall 

  • Overall portfolio occupancy remained healthy at 99.8%, as at 31 May 2015, despite an unexpected lease termination of an office unit in Paragon. 
  • Paragon has subsequently become fully-committed again. Rental reversions at Paragon continued to stay positive at 9.8% for 9MFY15, but this was lower than the 11.8% achieved in 1HFY15, which implies a moderation in rental renewal growth rates in 3QFY15. This is unsurprising given the soft retail sentiment. 
  • The Clementi Mall’s rental reversion came in at - 11.4% for 9MFY15, a deterioration from the - 8.8% recorded in 1HFY15. We understand that this was partly due to management’s efforts to retain an existing tenant by offering more competitive rental rates. 
  • Overall portfolio rental reversion for SPH REIT was 9.2% for 9MFY15. 

Maintain HOLD 

  • SPH REIT’s gearing remained stable at 26.0%. Management also increased its interest rate hedge ratio from 55% to 85%. This resulted in a higher cost of debt of 2.55% (1HFY15: 2.5%), while finance expenses also rose 15.7% QoQ to S$5.8m due to costs associated with the interest rate swaps. 
  • We retain our forecasts, HOLD rating and S$0.99 fair value estimate on SPH REIT. 
  • The stock is trading at FY15F P/B ratio of 1.1x and distribution yield of 5.2%, which are largely in-line with its historical averages since its IPO. 

(Wong Teck Ching Andy) 

Source: http://www.ocbcresearch.com/