SPH REIT - DBS Research 2016-04-06: Paragon stands tall despite retail headwinds

SPH REIT - DBS Research 2016-04-06: Paragon stands tall despite retail headwinds SPH REIT SK6U.SI 

SPH REIT - Paragon stands tall despite retail headwinds 

  • 2Q16 DPU flat at 1.40 Scts, in line with our expectations 
  • Asset enhancement project is on schedule. 
  • Outlook stable, maintain HOLD. 

Performance in line with our expectations 

• Results in line with expectations: 

  • DPU declared for 2Q16 was 1.40 Scts, flat y-o-y; this brings 1H16 DPU to 2.73 Scts which represents 49% of our FY16F DPU forecast of 5.53 Scts. 

• Flat distribution due to higher interest expense and larger amount of units in issue: 

  • Reported NPI increased by 0.9% y-o-y, driven by 1.2% increase in revenue and 2.3% increase in expenses. The increase in expenses was due to a one-off property tax provision for the prior year based on the assessment received. 
  • Excluding the provision, NPI would have gone up by 3.2%. 
  • However, income available for distribution, which was not impacted by the provision, only increased by 0.6%. This was mainly due to: 
    1. higher finance cost, up 21% y-oy from S$5m to S$6m; and 
    2. greater number of units in issue as 100% of management fees were paid in units. 

• Resilient performance from Paragon: 

  • Paragon’s NPI increased by 3.4% y-o-y, whereas NPI from Clementi Mall was unchanged. NLA renewed at Paragon was 160,683 sqft (22.5%), and achieved positive rental reversion of 4.3%. Tenant sales held steady. 

• Conservative balance sheet: 

  • Balance sheet remains strong with low gearing of c.26%, with c.85% debt fixed. 
  • S$250m debt, due in July 2016, is already under negotiation; renewal interest rate is likely to be lower if the tenure remains at 3 years. 

Paragon: Asset enhancement on schedule 

• AHU project in progress: 

  • The Air Handling Unit (AHU) decanting project in Paragon is progressing as scheduled. A multi-phased approach has been adopted from Sep 2015 to mid-2018 to ensure minimal disruption to tenants and shoppers. 

• Tenants to benefit from additional space: 

  • The additional 7,000 sqft in NLA will be utilised to reconfigure retail strata spaces rather than creating new spaces, as Paragon is already operating at a very high efficiency. 
  • Marks & Spencer and Givenchy are examples of tenants who have benefited from the additional space. Emporio Armani has also committed to take up part of the reconfigured space at level 1.

Stable outlook 

  • We believe Paragon will continue to deliver higher margins and outperform the rest of properties along Orchard Road, due to its prime location and prestigious tenant mix. 
  • The management believes that based on Paragon’s track record, luxury and mass-luxury spending will be more resilient in an otherwise weaker retail environment, the mall should stand tall despite the headwinds. 
  • Moreover, the opening of the first Apple Store in Singapore at Knightsbridge Mall next door will be a pull factor for additional shopper traffic to Paragon. 

Maintain HOLD, TP S$0.99 

  • With 2Q16 results in line with our expectations, we maintain our HOLD call and TP of S$0.99.

Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-04-06
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.99 Same 0.99