SPH REIT - DBS Research 2015-10-13: The Paragon of Orchard Road

SPH REIT - DBS Research 2015-10-13: The Paragon of Orchard Road SPH REIT SK6U.SI 


Stock is fairly priced 

  • We currently have a HOLD recommendation, with TP of S$0.99
  • SPH REIT's dividend yield of 5.7% 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 the property’s 
    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% for Paragon. 
  • At Clementi Mall, while income is supported by the Sponsor’s income support, upside to rents in the near term appears limited due to minimal lease expiries until 2017. 

Strong rebound in tenant sales at Clementi Mall 

  • Paragon achieved healthy reversions of 9.6% despite a 3.2% drop in tenant sales, and occupancy costs were 19.0%. Meanwhile at Clementi Mall, full year reversions were down 5.6% (albeit for only 5% of NLA). More encouragingly, tenant sales at Clementi Mall rebounded 3.6% to S$242m, translating to healthy occupancy costs of 14.6%. 


  • We currently have a DCF-backed target price of S$0.99, implying a dividend yield of 5.7% for FY16. 
  • The stock has outperformed other retail REITs in recent months, as we believe investors have been drawn to the REIT’s resilient earnings profile and conservative balance sheet. 
  • With limited upside to our TP, we maintain our HOLD call. 

Key Risks to Our View: Rise in interest costs. 

  • SPH REIT’s all-in cost of de Rise in interest costs bt stands at 2.55%, with c.85% of borrowings in fixed rates. In a rising interest rate environment, we see higher-than-expected interest costs when the Trust refinances its next floating-rate tranche of S$250m (c.30% of total debt) in 2016.

Rachael TAN DBS Vickers | Derek Tan DBS Vickers | Mervin Song DBS Vickers | http://www.dbsvickers.com/ 2015-10-13
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.99 Down 1.03