Singapore REITs - OCBC Investment 2017-06-05: Valuations Not Cheap, Be Selective

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Singapore REITs Outlook SREIT Recommendation CAPITALAND MALL TRUST C38U.SI FRASERS CENTREPOINT TRUST J69U.SI KEPPEL DC REIT AJBU.SI FRASERS LOGISTICS & IND TRUST BUOU.SI

Singapore REITs - Valuations Not Cheap, Be Selective

• DPU growth turned positive.
• More encouraging data points.
• Add Capitaland Mall Trust CMT to our top picks list.

Slightly better 1QCY17 showing 

• Under OIR’s S-REITs coverage, overall DPU performance came in positive at 2.4% YoY in 1QCY17, a welcome reversal as compared to the five preceding quarters of flat to negative DPU growth. Furthermore, none of the REITs we cover reported results which fell short of expectations. 
• On the other hand, Mapletree Greater China Commercial Trust and Frasers Logistics Trust beat our expectations slightly, while the rest were in-line. 
• Strong YoY DPU performances came in from OUE Hospitality Trust (+18.2%), Keppel DC REIT (+13.2%) and Ascendas REIT (+13.0%). 
• Looking ahead, within our coverage, we project overall DPU growth for the current financial year to decline marginally by 0.2% (market-cap weighted average), partly driven by the rights issue exercise announced by Ascott Residence Trust in Mar this year.
• Thereafter, we project a 2.8% growth in DPU for the next financial year.

More positive industry data points 

• For the industrial sector, Singapore’s manufacturing PMI remained in expansionary mode in Apr (51.1), while industrial production growth of 6.7% YoY for the same month beat market expectations. Although core Grade A CBD office rents continued to trend downwards QoQ in 1Q17, the magnitude of decline moderated from the previous quarter. 
• Retail sales excluding motor vehicles returned to positive territory (+0.7% YoY for the month of Mar), following a 4.9% dip in Feb. For the hospitality sector, RevPAR and visitor arrivals from Jan-Mar rose 0.4% and 4.0% YoY, respectively.

Valuations not cheap; be selective 

• We believe the markets have largely factored in expectations of a further rate hike during the upcoming Jun FOMC meeting, with a probability of 92.7% based on the Fed funds futures rate. Beyond this, with ongoing geopolitical uncertainties, we believe a question mark remains on whether there will be more than three rate hikes this year. 
• Furthermore, with major equity indices trading at relatively high valuations and given the continued tightening of bond yield spreads, coupled with ample liquidity in the markets, we see room for further tightening in S-REIT yield spreads in the near-term, but urge investors to be selective by adopting a prudent bottom-up stock picking strategy. 
• Currently, the FTSE ST REIT Index is trading at a forward yield spread of 391 bps against the Singapore Government 10-year bond yield, which is approximately 0.9 standard deviations below the 5-year average (427 bps).

Maintain NEUTRAL on the S-REITs sector.

• Besides Frasers Centrepoint Trust [Rating: BUY; Fair Value: S$2.28], Keppel DC REIT [Rating: BUY; Fair Value: S$1.39] and Frasers Logistics & Industrial Trust [Rating: BUY; Fair Value: S$1.12] which we reiterate as our preferred sector picks, we also add CapitaLand Mall Trust (CMT) [Rating: BUY; Fair Value: S$2.20] into this list. 
• CMT has underperformed its peers and the broader sector YTD, and we believe headwinds facing the group have been priced in. It is one of the few S-REITs which are still offering forward yields above their 5-year averages.

Wong Teck Ching Andy CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-06-05

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