SPH REIT - OCBC Investment 2016-08-03: Offering stability supported by healthy valuations

SPH REIT - OCBC Investment 2016-08-03: Offering stability supported by healthy valuations SPH REIT SK6U.SI 

SPH REIT: Offering stability supported by healthy valuations

  • Resilient portfolio
  • Room for inorganic growth
  • Upgrade to BUY with higher FV

Offering stability amid market volatility

  • We view SPH REIT as a solid investment proposition amid vagaries in the macroeconomic landscape, given its resilient portfolio and stable earnings profile. 
  • Despite headwinds facing Singapore’s retail sector, SPH REIT managed to deliver positive rental reversions of 4.9% for Paragon (27.0% of NLA) and 4.5% for The Clementi Mall (TCM) (11.0% of NLA) for 9MFY16. Both malls were also fully leased, as at 31 May 2016, a reflection of their strong positioning within their respective catchment areas.

Potential inorganic growth supported by strong balance sheet

  • We believe one growth driver for SPH REIT would come inorganically from its potential acquisition of Seletar Mall, which is 70%-owned by its sponsor SPH. 
  • SPH REIT has a right-of-first- refusal on its sponsor’s stake, which has a carrying value of S$495m, as at 31 Aug 2015. 
  • Given SPH REIT’s healthy gearing ratio of 25.7%, we believe it will be able to comfortably finance this acquisition wholly by debt. If this materialises, we estimate that SPH REIT’s gearing ratio would increase to ~35.4%. 
  • Further analysis based on a passing rent assumption of ~S$14 psf/month, 100% occupancy rate and 60% NPI margin (asset not fully stabilised yet) suggests that this transaction could potentially add 3-4% to SPH REIT’s DPU on an annualised basis, based on our projections.

Laggard local retail REIT play; upgrade to BUY

  • SPH REIT’s share price has underperformed other Singapore focused retail REITs YTD. This is despite the fact that its DPU growth profile exhibited a similar trend to these peers during the 2QCY16 results period, recording a low single-digit YoY growth. 
  • Valuations are also undemanding, in our view. 
  • SPH REIT is currently trading at FY17F distribution yield of 5.9% and P/B of 1.01x. The former is approximately 1.2 standard deviations (SD) above its historical average forward yield since its listing, while the latter represents 1.1 SD below its historical forward mean. 
  • As we lower our risk-free rate assumption from 3.0% to 2.4% and roll forward our valuations, we derive a higher fair value of S$1.05 (previously S$0.99). 
  • Supported by expected total returns of ~17%, we upgrade SPH REIT from Hold to BUY.

Wong Teck Ching Andy CFA OCBC Securities | http://www.ocbcresearch.com/ 2016-08-03
OCBC Securities SGX Stock Analyst Report BUY Upgrade HOLD 1.05 Up 0.99