SPH REIT - CIMB Research 2016-04-04: Steadily improving

SPH REIT - CIMB Research 2016-04-04: Steadily improving SPH REIT SK6U.SI 

SPH REIT - Steadily improving 

  • 1HFY8/16 core net profit was largely in line, at c.50% of our full-year forecast. 
  • Better operating performance in 2Q16 was led by positive rental reversions and improved cost management. 
  • Portfolio occupancy cost remains competitive, bodes well for FY17 rental reversion. 
  • Planned asset enhancement initiatives (AEIs) at Paragon and Clementi Mall will provide small boosts to earnings when completed, in our view. 
  • Retain Hold call with an unchanged DDM-based target price of S$1.05. 

2QFY16 results in line 

  • SPH REIT’s 2QFY16 core net profit was in line with expectations, at c.25% of our full year estimate. 
  • Topline rose 1.2% yoy to S$53.1m in 2QFY16 due to higher income from Paragon and high portfolio occupancy. 
  • Net property income (NPI) improved by a narrower 0.9% yoy to S$40.6m in 2QFY16 due to a one-off provision for prior year property tax. Excluding this, NPI would have risen 3.2% yoy due to better cost savings. 
  • Distribution income of S$35.5m translated into 2QFY16 DPU of 1.4 Scts, stable yoy. 

Better cost management… 

  • Excluding one-offs, there were higher cost savings yoy in 2QFY16 thanks to savings in utilities from lower tariff rates, more efficient energy consumption from the new chillers put in place as part of the AEI programme and lower marketing expenses. 

… and positive rental reversion 

  • The better results were driven by positive 4.3% rental reversion across the portfolio in 1HFY16. 
  • Paragon renewed c.22.5% of its leases, achieving 4.3% higher rents yoy while Paragon recontracted 1.1% of its net lettable area (NLA) with a 3.1% uplift in rents. With a remaining 1.2% of NLA to be re-leased for the remainder of FY16 and a further 36.4% in FY17. 
  • We believe, with steady footfall at its malls and occupancy cost in the range of 14.6-19%, the trust will continue to achieve positive rental reversions in FY16. 

AEIs expected to yield positive returns when completed 

  • Meanwhile, its AEI at Paragon to replace the air handling unit and decant 7,000 sq ft (0.8% of portfolio NLA) is on track for completion in mid-2018. Part of the space has been pre-leased by Emporio Armani, while Marks & Spencer is expected to expand its footprint on level 3 and more specialty units will be introduced to widen retail offerings. 
  • Another AEI, at Clementi Mall, is being planned and is due for completion in the next 2 years. We anticipate that these exercises will enhance returns when completed. 

Retain Hold call 

  • We keep our FY16-18 DPU estimates and maintain our DDM-based target price of S$1.05. 
  • While we like SPH REIT’s portfolio and stable operating performance, our target price offers a limited 7.8% upside from the current level. 
  • We believe that the acquisition of Seletar Mall (balance sheet is healthy with low gearing of 25.7%) could be a potential medium-term catalyst. However, no timeline has been indicated. Hence, we maintain our Hold recommendation.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-04-04
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.05 Same 1.05