SPH REIT - DBS Research 2016-07-08: Resilient Results

SPH REIT - DBS Research 2016-07-08: Resilient Results SPH REIT SK6U.SI 

SPH REIT - Resilient Results

  • 3QFY16 DPU 1.36 Sct up 0.7%, in line with our expectations
  • Positive rental reversion of 4.9%, however, shopper traffic declined 2.2%
  • Outlook stable, maintain HOLD. 



Stock is fairly priced. 

  • We currently have a HOLD recommendation, with TP of S$0.99. SPH REIT's dividend yield of 5.9% reflects the strength of its assets and stability of earnings. However, at this point we believe that comparable retail S-REITs offer more attractive yields.


Paragon to continue to drive earnings growth. 

  • We believe that Paragon will continue to outperform the rest of Orchard Road for both retail and office assets, due to its 
    1. location and frontage in the prime Orchard Road shopping district, as well as 
    2. proximity to the Mount Elizabeth medical cluster. 
  • As such, we assume reversions of 3.5-4% for Paragon. 
  • At Clementi Mall, despite the Sponsor’s income support, upside to rents in the near term appears limited due to minimal lease expiries until 2017.


Potential acquisition a catalyst. 

  • With a healthy gearing of 26% and cost of debt of 2.84%, SPH REIT is well poised for debt- funded acquisitions. The next growth catalyst for the REIT will be the acquisition of the Sponsor’s 70% stake in Seletar Mall. However, we believe this acquisition is likely to be more of a medium term prospect, as the mall was only completed in Dec 2014 and is still on its first lease cycle.


Valuation:

  • We have a DCF-backed target price of S$0.99, implying a dividend yield of 5.9-6.0% for FY16-17F. Due to the lack of near-term catalysts and limited upside to TP, we maintain our HOLD call.


Key Risks to Our View:

  • Rise in interest costs. SPH REIT’s all-in cost of debt stands at 2.84%, with c.85% of borrowings in fixed rates. In a rising interest rate environment, we will monitor closely the refinancing of its floating-rate tranche of S$250m (c.30% of total debt) due in July 2016.




Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-07-08
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.99 Same 0.99


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