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

SPH REIT SK6U.SI

SPH REIT - Steady as she goes

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%.

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.

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