SPH REIT - CIMB Research 2016-07-07: Step by step

SPH REIT - CIMB Research 2016-07-07: Step by step SPH REIT SK6U.SI 

SPH REIT - Step by step

  • Results within expectations; 3Q/9M DPU at 24%/73% of our FY16 forecast.
  • DPU improvement led by higher portfolio rents and full occupancy.
  • AEIs and tenant remixing to provide some income booster over the next two years.
  • Potential acquisitions could act as catalysts, significant debt headroom with current gearing of 25.7%.
  • Maintain Hold with a slightly lower DDM-based target price of S$1.03.

Results bolstered by positive rental renewals and high occupancy

  • SPH REIT reported a 1.9% yoy higher gross revenue at S$52.2m, led by higher rental income for both Paragon and Clementi Mall. The cost-to-income ratio remained stable, translating to a corresponding 1.8% rise in NPI to S$40m. This was partly eroded by higher interest expenses. After retaining S$0.42m, income available for distribution came in at S$34.6m, translating to a DPU of 1.36 Scts, +0.7% yoy.

Full occupancy at both malls, 4.9% uplift in average portfolio rents

  • Both malls were 100% filled and the trust enjoyed an overall 4.9% rental hike for its expiring leases. Notably, Paragon enjoyed a rental uplift of 4.9% YTD for the 27% of leases renewed, despite experiencing a dip in shopper footfall in 3Q16. 
  • Meanwhile Clementi Mall saw a 4.5% positive rental reversion for 11% of its leases re-contracted YTD.

AEIs and tenant remixing to optimise returns during this lease cycle

  • Looking ahead, there is 26.5% and 34.5% of portfolio gross rental income to be renewed in FY17 and FY18, respectively. 
  • With about 78% of Clementi Mall’s income due for in FY17, SPH REIT has reconfigured the property for a more efficient layout. The revamped basement food cluster saw the addition of 7 food kiosks for a total of 21. 
  • In Paragon, the additional space created during its AEI has been filled ahead of its year- end opening. These moves should underpin income stability for the trust.

New acquisitions could act as share price catalysts

  • In the medium term, we anticipate the acquisition of Seletar Mall, which was jointly developed by its parent SPH and United Engineers. The property, completed in Nov 14, is fully tenanted at present, and we expect the first rental renewal cycle to kick in from next year. 
  • SPH REIT has significant debt head room with its current gearing at 25.7%. In addition, 84.7% of its interest cost has been fixed with an average funding cost of 2.84%.

Maintain Hold

  • SPH REIT offers an FY16/17 DPU yield of c.6%. 
  • We believe the catalysts for share price performance would materialise when it expands its portfolio size via acquisitions, such as Seletar Mall. Hence, we maintain our Hold call with a slightly lower DDM-based target price of S$1.03. 
  • Potential upside risk to our call exists if the acquisition catalyst happens earlier than expected.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-07-07
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.03 Down 1.05