SPH REIT - CIMB Research 2017-10-10: Steady Performance

SPH REIT - CIMB Research 2017-10-10: Steady Performance SPH REIT SK6U.SI

SPH REIT - Steady Performance

  • SPH REIT's 4QFY8/17 and FY8/17 DPUs in line with our and Bloomberg consensus expectations.
  • Better cost management and positive portfolio rental reversion lifted bottomline.
  • Phase 2 asset enhancement initiative (AEI) at Paragon could provide a small boost when completed in 2018F.
  • Low gearing provides room to explore inorganic growth opportunities.
  • Maintain Hold with Target Price S$1.06.

4QFY8/17 and FY8/17 DPUs within expectations 

  • SPHREIT reported a 1.3% yoy rise in 4QFY17 revenue to S$52.9m while distribution income grew 1.1% yoy to S$36.3m. 4QFY17 DPU was 1.42 Scts, up 0.7% yoy. 
  • For FY17, the trust achieved a DPU of 5.53 Scts, up 0.5% yoy, accounting for 97.9% of our forecast. It also enjoyed a S$34.9m portfolio revaluation gain, thanks to organic improvement and cap rate compression.

Boost from positive portfolio rental growth and cost management 

  • The better performance in FY17 was the result of higher contributions from both Paragon and Clementi Mall, and lower property expenses. 
  • Although there was a slight negative rental reversion of 0.8% at Paragon, the positive rent improvements at Clementi Mall helped offset this decline. As a result, average portfolio rent grew 1.2% yoy. In addition, there was cost savings due to proactive utility cost management which lifted NPI margin to c.79%.

Completion of AEI at Paragon in 2018F could provide a small kicker 

  • Operating environment for both properties continue to be robust with stable shopper traffic and a slight uptick in tenant sales at Paragon while Clementi Mall saw a marginal 0.3% decline in shopper traffic and 5.8% dip in tenant sales. 
  • The second phase of AEI at Paragon has commenced and when completed in mid-2018, it should add a further 5,000 sq ft of leasable area.

Strong balance sheet provides room to tap inorganic growth 

  • SPHREIT’s balance sheet is healthy with gearing at a low 25.4% as at end-FY17 and 85.9% of its debt cost on a fixed rate basis. Average cost of debt was at 2.82%. We believe this should enable SPHREIT to tap inorganic opportunities for growth.

Maintain Hold 

  • We tweak our FY18-19 DPU estimates by 0.5% post results and introduce our FY10 forecasts. We maintain our DDM assumptions, with cost of equity unchanged at 7.3% (risk free rate: 2.5% and terminal growth of 2%). However, our DDM-based target price rises slightly to S$1.06 as we roll forward our assumptions. 
  • Maintain our Hold rating. 
  • Key potential re-rating catalysts include new acquisitions to boost growth upside. 
  • Downside risks include a lacklustre retail environment which could hamper rental growth.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-10-10
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.06 Up 1.040