UOB Kay Hian 2015-08-19: Sabana Shari'ah Compliant REIT - Moment Of Truth Beckons.

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SABANA SHARI'AH COMPLIANT REIT M1GU.SI

Moment Of Truth Beckons 

• The market’s pessimism over Sabana’s master lease renewals presents a buying opportunity as negatives are more than priced in. Investor concerns over its 11 master leases, expiring this November, may be overblown. 
• We understand that the renewals (stemming from 2013) are a few steps shy of conclusion. Our built-in worstcase scenario of an occupancy drop to 50% for the affected master leases still implies a healthy > 7% yield. 
• Maintain BUY with a DDM-based target of S$0.95. 

WHAT’S NEW 

• The sharp 17% decline in share price ytd reflects investors’ wariness over the company’s efforts to renew its expiring eight master leases and is overblown. This presents a buying opportunity as negatives have been factored in. 

STOCK IMPACT 

 Negatives more than factored in. 

• During our post-results discussion, management reassured us of the impending completion of the renewal of eight of its 11 expiring master leases (46% by NLA). The company is looking to convert three of the remaining properties into multi-tenanted buildings with underlying occupancies from 62-94%. 
• Management alludes that they are a few steps shy of putting pen to paper. 23 Serangoon North Ave, 34 Penjuru Lane, and 15 Jalan Kilang Barat have master leases expiring this November, and are slated for multi-tenanted conversion. The company was similarly plagued by lease renewals in May 13, and saw its share price beaten down by 21% in the span of a month. 
• Our worst-case scenario assumes occupancies of 50% for the expiring master leases, still implying a healthy > 7% yield. Business park and high tech space to benefit from spillover office demand. Due to JTC’s ruling that requires a 70% occupation by a master-tenant, the environment for leasing is quite challenging, especially for tenants that qualify as master-tenants (occupying more than 1,500 sqm). 
• However, Sabana’s high tech industrial space (44% by portfolio NLA) should see some pick-up as the domestic business park space sees substantial pre-commitment. Being a close substitute, the high tech portfolio should see some scope for spillover demand, in particular 151 Lorong Chuan (30% of portfolio valuation). 
• In addition, increased appetite from pharmaceuticals and technology industries should bode well for the high tech industrial space this year. 

 Recycling of under-performing assets and acquisition-led growth key to management’s strategy. 

• Apart from the company’s drive to renew master leases, management also has capital recycling in its sights, as the divestment of underperforming assets and pursuit of yield-accretive acquisitions remain at the core of its plans. Debt headroom of $45m (assuming a comfortable 40% gearing limit) would support domestic acquisitions, likely funded by a combination of debt and equity. Management reiterated their reluctance to stretch their gearing levels, preferring to remain at a more prudent 40%. 

 Future endeavours to smoothen lease expiry profile. 

• Management continued to highlight diligence in monitoring expiring leases. Going forward, the company will prevent lease expiry from exceeding 30-35% at any given year. 

EARNINGS REVISION/RISK 

• Key risks include: 
  1. Inability to renew the eight master leases due Nov 15 
  2. Inability to ensure master tenants occupy 70% of GFA. 

VALUATION/RECOMMENDATION 

• Maintain BUY with a target price of S$0.95 based on DDM (required rate of return: 8.3%, terminal growth: 1.5%). 

SHARE PRICE CATALYST 

• Renewal of master leases.

Derek Chang | Vikrant Pandey | http://research.uobkayhian.com/ UOB KH 2015-08-19

BUY Maintain BUY 0.95 Same 0.95