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.

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.

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.

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.

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.

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