SPH REIT - CIMB Research 2016-01-06: Two-Pronged Improvement

SPH REIT SK6U.SI

SPH REIT Two-pronged improvement

1QFY8/16 results within expectations; DPU of 1.33 Scts made up 24% of our fullyear estimates.
Earnings boosted by topline improvement from positive rental reversions, and by higher NPI margins on the back of savings in utilities and marketing expenses.
Reconfiguring exercise at Clementi Mall under planning to improve layout and increase range and depth of its offerings.
Decanting 7,000sf at Paragon should boost rental income when completed.

SPH REIT reported 1QFY8/16 DPU of 1.33 Scts, flat growth yoy and making up 24% of our full-year projection. While income available for distribution showed a 3.8% improvement to S$35.3m on the back of higher revenue and NPI, this was partly offset by higher interest expense.
In addition, retention of S$1.3m (4.5% of income) resulted in stable distribution income and DPU performance.

In terms of operations, topline rose 2.9% to S$52.1m while NPI expanded 5.9% to S$40.1m, thanks to positive portfolio rental reversion of 3.2% as well as a 2%pt improvement in NPI margin to 76.9%. The latter was due to savings in utilities and lower marketing expenses.
Whilst the rental uplift of 3.2% at the Paragon was lower vs. the preceding quarters due to weaker retail sentiment, the Clementi Mall continued to enjoy a 5.4% increase in renewals.

Looking ahead, only a minimal 3.3% of the trust’s income is to be re-contracted in FY16 while a larger 31.3% expires in FY17, largely coming from Clementi Mall (85.2% of its total mall income). This provides a good opportunity to create a more efficient layout and increase the range and depth of the asset.
While no details have been shared, we believe this exercise should enhance the returns from the property in the longer run.

Meanwhile, the trust is undergoing an air handling unit (AHU) decanting exercise at the Paragon. This will free up 7,000sf of leaseable area, which is already partially precommitted to Emporio Armani. This exercise will be undertaken in phases from Sep 2015 to Mar 2018 and should boost the REIT’s portfolio income when completed.

We tweak our FY16-18 DPU marginally lower to ascribe a slightly higher interest expense and maintain our Hold rating on the stock.
Our DDM-backed target price is adjusted to S$1.05. SPH REIT is trading at c.1x P/BV and offers investors FY16F DPU yield of 5.8%.
Potential acquisition of the fully occupied Seletar Mall could provide a medium term re-rating catalyst.
Balance sheet is strong with gearing of 25.7%.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-01-06

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.05 Down 1.07