SPH REIT - CIMB Research 2015-10-13: Growth amid stability

SPH REIT SK6U.SI

SPH REIT Growth amid stability

4Q DPU of 1.39 Scts is underpinned by relatively flat topline and better cost management.
Sustainable improved NPI margins with updating of older M&E equipment.
Paragon and Clementi Mall still enjoying higher shopper footfalls.
Positive rental reversions and AEI to boost forward earnings.
Maintain Hold call with unchanged DDM-based target price of S$1.07.

4QFY15 results were within expectations, with a DPU of 1.39 Scts. Topline was relatively flat despite positive rental reversion of 8.6% over preceding levels, impacted by the loss of income during fitting-out periods at Paragon as part of its tenancy revitalisation programme. 4Q NPI rose 0.4% yoy to S$38.2m on better cost management.
For FY15, NPI rose 3.3% yoy to S$155.6m as revenue grew 1.4% to S$205.1m. DPU improved 0.7% yoy to 5.47 Scts while its book NAV rose to S$0.95 on revaluation gains from Paragon.

NPI margin rose to 75.1% in 4Q and 75.9% for FY15, thanks to savings in utilities (on lower tariff rates and more efficient consumption from new chillers) and lower maintenance cost, partly offset by higher property taxes and marketing expenses. We expect the improved margins to be sustained going forward.

In terms of operations, Paragon saw a 2% rise in visitor traffic, but tenant sales dipped 3.2% from a year ago, thus raising occupancy costs to 19%. Meanwhile The Clementi Mall saw a 3.6% rise in tenant sales on a corresponding 4.7% rise in shopper traffic with occupancy costs at 14.6%. Businesses in the latter that continue to do well include supermarket, F&B as well as lifestyle sectors.

Looking ahead, SPH REIT is expected to continue enjoying positive rental reversions, with 9.8% and 31.9% (mainly from Clementi Mall) of rental income due to be renewed in FY16 and FY17, respectively. Current occupancy cost at Clementi Mall is still below its peers’ range of 16-18%.
In addition to higher rents, decanting 7,000 sq ft of space on replacing the air handling unit at Paragon will release more leaseable area gradually from Sep 15 to Mar 18, thus boosting its rental income. Gearing remains low at 25.7%.

We leave our FY16-17 earnings unchanged and introduce our FY18 estimates. We retain our Hold call and DDM-backed target price of S$1.07. SPH REIT is trading at 1.01x P/BV and offers investors an FY16 DPU yield of 5.8%, in line with its S-REIT peers. The potential acquisition of the fully occupied Seletar Mall could provide a medium-term re-rating catalyst.

LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2015-10-13

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.07 Same 1.07