Singapore REITs - OCBC Investment 2015-12-11: Cherry picking is key amid challenging conditions

Singapore REITs - OCBC Investment 2015-12-11: Cherry picking is key amid challenging conditions CAPITALAND MALL TRUST C38U.SI  FRASERS CENTREPOINT TRUST J69U.SI  KEPPEL DC REIT AJBU.SI 

Singapore REITs: Cherry picking is key amid challenging conditions 

 Muted DPU growth expected 
 Valuations not demanding 
 CMT, FCT and KDCREIT our top picks 

Cautioned market on potential downside of S-REITs 

  • OIR published a tactical paper on 21 Jul 15, highlighting our belief that the risk-reward of the S-REITs sector had turned unfavourable. Our cautious view on the sector turned out to be a timely affair, as the FTSE ST REIT Index (FSTREI) subsequently suffered a dip of 11.5% since our report publication, with its YTD trough coming in approximately one month after our report. 
  • Looking ahead, the S-REITs sector's market-cap weighted DPU growth is expected to come in at 3.3% YoY for FY15/16, before easing to 2.6% in FY16/17 and 1.8% in FY17/18. 
  • The factors underpinning this moderation in growth would stem from slowing or declining rentals, rising operating costs and less favourable demand and supply dynamics within the various industries. 

Increasing possibility of a Dec rate hike; expect volatility ahead 

  • The Fed funds futures market has priced in a 78% probability of a Fed lift-off during the next FOMC meeting from 15-16 Dec, a stark increase from the 41% probability as at 30 Sep 2015. 
  • The Fed is likely to finally begin normalising its interest rates after an unprecedented period of near zero rates over the past seven years, and we find this unsurprising, given the recent solid Oct and Nov non-farm payrolls data, while the U.S. unemployment rate stayed constant at 5%, the lowest in more than seven years. In addition, the Fed Chairperson Janet Yellen also appears to have been preparing the markets for this imminent event, sounding more ‘hawkish’ during her recent statements. 
  • We believe there may still be increased volatility ahead, even after the overhang of the Fed funds rate hike is lifted, as the attention of the market would then turn towards how aggressively the Fed would subsequently raise its benchmark rates. 

Valuations do not appear demanding at this juncture 

  • Although our thesis of slowing DPU growth remains intact and we are cognisant of headwinds that will continue to plague the sector ahead, we opine that the market has priced in some of these negatives and current sector valuations are not demanding. 
  • The FTSE ST REIT Index (FSTREI) is trading at a forward yield spread of 4.7 ppt against the Singapore Government 10-year bond yield, as compared to the 5-year average of 4.3 ppt. 
  • In light of the aforementioned considerations, we are keeping our NEUTRAL rating on the S-REITs sector. We recommend investors to adopt a bottom-up stock picking strategy, and prefer S-REITs with solid execution capabilities, defensive attributes and favourable risk-reward profiles. 
  • Our overall top sector picks are CapitaLand Mall Trust [BUY; FV: S$2.09], Frasers Centrepoint Trust [BUY; FV: S$2.25] and Keppel DC REIT [BUY; FV: S$1.24]

Wong Teck Ching Andy OCBC Investment | http://www.ocbcresearch.com/ 2015-12-11
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 2.09 Same 2.09
BUY Maintain BUY 2.25 Same 2.25
BUY Maintain BUY 1.24 Same 1.24