SPH REIT - OCBC Investment 2016-12-05: Steady as she goes

SPH REIT - OCBC Investment 2016-12-05: Steady as she goes SPH REIT SK6U.SI

SPH REIT - Steady as she goes

  • Consistent performer.
  • Lowest gearing ratio.
  • Attractive valuations.

Recent financial performance points to resilience 

  • SPH REIT has consistently delivered stable financial results since its IPO, with DPU increasing at a CAGR of 0.6% from FY14 to FY16. Although this figure appears unexciting, we believe the stability offered provides defensiveness and creates value for investors in this current lacklustre and uncertain macroeconomic climate. 
  • During SPH REIT’s recent FY16 results, both its malls registered positive NPI growth, with Paragon and The Clementi Mall (TCM) delivering growth of 3.6% and 2.3%, respectively. In addition, if we compare Paragon’s performance to malls in the Orchard Road precinct owned by other retail REITs, it has proven to be the most resilient, in our view. 
  • We believe this can be attributed to Paragon’s strong brand equity, and management’s efforts to introduce new-to- market concepts to the mall to revitalise its tenant mix. Paragon achieved positive rental reversions of 5.2% in FY16, while TCM also raked up higher rental uplifts of 7.8%.

Financial position remains healthy 

  • Besides SPH REIT’s steady financial performance, it also has the lowest gearing ratio (25.7% as at 31 Aug 2016) within the S-REITs universe. 
  • 85.9% of its debt is on a fixed rate basis, with no refinancing requirements till 2018.

Buying opportunities from recent correction 

  • SPH REIT’s share price has corrected 5.0% since the start of Oct, in-line with the tepid performance of the FTSE ST REITs Index (-6.7%) during the same period. This has been driven largely by expectations of a rate hike during the Dec FOMC meeting and concerns over inflationary pressures and possibility of a faster-than-expected upward trajectory in interest rates next year following Donald Trump’s victory in the U.S. presidential elections. 
  • From a valuation standpoint, SPH REIT is currently trading at FY17F distribution yield of 5.9%, which is approximately one standard deviation above its average forward mean since its listing; while its yield spread against the Singapore government 10-year bond yield is also undemanding at 355 bps (+0.6 standard deviation above historical average). 
  • Reiterate BUY on SPH REIT, with a slightly higher fair value estimate of S$1.06 (previously S$1.05) as we make some fine- tuning to our assumptions.

Wong Teck Ching Andy CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-12-05
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.06 Up 1.050