SPH REIT - DBS Research 2016-10-07: Potential influx of new traffic to Paragon

SPH REIT - DBS Vickers 2016-10-07: Potential influx of new traffic to Paragon SPH REIT SK6U.SI

SPH REIT - Potential influx of new traffic to Paragon

  • FY16 DPU of 5.50 Scts, up 0.5% y-o-y, in line.
  • Drop in traffic not a concern due to 5.4% positive rental reversion.
  • AHU project and linkbridge from Cairnhill may draw new blood to Paragon.
  • Maintain HOLD, TP revised to S$1.00.

Stock is fairly priced. 

  • We currently have a HOLD recommendation, with TP of S$1.00. SPH REIT's dividend yield of 5.7% 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 3.5-4.0% for Paragon. 
  • A linkbridge connecting Cairnhill redevelopment and Paragon, to be opened in November/December 2016, may draw new traffic to the mall.
  • At Clementi Mall, more than 50% lease expirations in FY17 could set a new base for rent.

Potential acquisition a catalyst. 

  • With a healthy gearing of 25.7% and cost of debt of 2.82%, 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 December 2014 and is still on its first lease cycle.


  • We have a DCF-backed target price of S$1.00, implying a dividend yield of 5.7% for FY17F-18F. 
  • Due to the lack of near-term catalysts and limited upside to TP, we maintain our HOLD call.

Key Risks to Our View

  • Short WALE due to lease expirations at Clementi Mall. The portfolio has a relatively short WALE of 2.3 years by NLA.
  • 18.5% of portfolio NLA (c.166,000 sqft) will expire in FY17.
  • The majority comes from Clementi Mall where more than 50% or close of 104,000 sqft of the mall’s NLA are due in the next 12 months.

Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-10-07
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.00 Up 0.990