SPH REIT - CIMB Research 2018-01-08: Results In Line

SPH REIT - CIMB Research 2018-01-08: Results In Line SPH REIT SK6U.SI

SPH REIT - Results In Line

  • SPH REIT's 1QFY8/18 DPU was within our expectations at 23.8% of our FY18 forecast.
  • Negative reversions largely from Paragon.
  • Significant debt headroom for inorganic growth opportunities.
  • Maintain Hold with an unchanged TP of S$1.06.

1QFY18 results highlights 

  • SPHREIT reported 1QFY18 gross revenue of S$53.5m, +1.7% yoy, while NPI improved a slightly better 1.9% yoy to S$42.2m on a slight uptick in operating margins due to lower marketing expenses. The improvement was marginally eroded by higher interest cost on the back of a slight increment in average funding cost. 
  • Distribution income of S$34.4m represents a 94.1% payout, translating into 1QFY18 DPU of 1.34 Scts, flat over the previous corresponding period.

Negative reversions for renewal leases 

  • During the quarter, the trust renewed 3.7% of its portfolio NLA at rents that were 10.6% lower than previous levels. 
  • The drag came largely from Paragon where 31,555 sqft of NLA was leased/renewed at 10.6% lower as most of the leases were committed a year ago amid weak retail sales sentiment. 
  • Meanwhile, Clementi Mall re-contracted 2,164 sqft of NLA at a 9.8% negative reversion as the replacement tenant was in a different trade mix.

A further 13.3% and 21.8% of NLA expiring in FY18-19 

  • Looking ahead, the trust has a further 13.3% of NLA expiring for the rest of FY18 and another 21.8% in FY19. The bulk of the renewals will come from Paragon. 
  • Whilst the near-term outlook for retail rents remains challenging, SPH REIT could benefit from the improved sentiment, thanks to the recent pick-up in Singapore retail sales and better economic outlook.

Healthy balance sheet with significant debt headroom 

  • The company’s balance sheet remains healthy with gearing at 25.4%. An estimated 37% (S$320m) of the trust’s debt is due to be rolled over in FY18. This puts the trust in a strong position to evaluate inorganic growth opportunities. Based on a gearing of 35- 40%, we estimate that the trust has debt headroom of c.S$490m-800m.

Maintain Hold 

  • We leave our FY18-20 DPU estimates unchanged for now and retain our DDM-based TP of S$1.06. Despite the near-term challenging environment, we continue to like Paragon and Clementi Mall for their niche positioning within their micro-markets. 
  • SPH REIT offers total return of c.4%. Hence, we retain our Hold rating. 
  • Key re-rating catalyst would be new and accretive acquisitions. 
  • Risks are protracted downturn in the retail sector which could result in an extended period of negative rental growth.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-01-08
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.060 Same 1.060