SPH REIT (SPHREIT SP) - Maybank Kim Eng 2018-01-08: A Pedestrian First Quarter

SPH REIT (SPHREIT SP) - Maybank Kim Eng 2018-01-08: A Pedestrian First Quarter SPH REIT SK6U.SI

SPH REIT (SPHREIT SP) - A Pedestrian First Quarter

Results in line, maintain HOLD 

  • We left our forecasts unchanged following SPH REIT’s 1QFY18 results, which were in line, with DPU flat YoY at S1.34cts. Its two commercial property assets remained fully occupied, while Paragon’s 10.6% rental reversion against earlier retail sales weakness reflects an expected slow recovery, despite more optimistic macros. 
  • We continue to see Paragon (82% of its AUM) as a good proxy into an earlier recovery for prime Orchard road rents. The share price of SPH REIT continues to anticipate potential acquisition upside. 
  • We also see limited upside catalysts but some downside risk to our TP offset by the 5.2% yield. Maintain HOLD and SGD1.00 DDM-based TP (WACC: 6.9%; LTG: 1.5%). 

Portfolio rental reversion at -10.6% 

  • SPH REIT delivered in line 1Q18 results, with revenue and NPI up 1.7% YoY and 1.9% YoY, respectively and its two malls fully occupied. Its performance was helped by a successful second renewal cycle at Clementi Mall in FY17. 
  • Rental reversion increased 3.7% in 1Q18 and the retention rate by NLA was 89%; revenue/ NPI was up 5.9% YoY/ 8.3% YoY.
  • Paragon recorded a -10.6% rental reversion for its leases (comprising 4.4% of its NLA) mostly committed a year ago against high occupancy costs. These reflect the recent softer retail backdrop despite a more optimistic macro outlook. Hence, we would expect a turnaround in reversions towards 2H18.

Strong balance sheet, waiting for deal catalyst 

  • Gearing stayed at 25.4% at end-Nov 2017, with average borrowing cost up slightly QoQ from 2.82% to 2.84%. 
  • SPH REIT is exploring refinancing options for a SGD320m tranche of its term loan facility due in FY18 (comprising 38% of its total debt). We further estimate about SGD820m in debt headroom (at 40% gearing) for potential acquisitions (Seletar Mall ROFR property and third-party assets in Australia).

Valuations are fair 

  • SPH REIT is trading at peak valuations since its IPO with a FY18E yield of 5.2% and P/B of 1.1x. We believe these largely price in potential acquisitive growth, given 1% DPU growth. 
  • We prefer Frasers Centrepoint Trust (Rating: BUY, Target Price SGD2.45, see report: Frasers Centrepoint Trust (FCT SP) - Trust In Community) for its resilient portfolio and visible growth drivers supporting 3.5% DPU CAGR FY17-20E.

Swing Factors


  • Earlier-than-expected pick-up in leasing demand for retail, office space driving improvement in occupancy.
  • Better-than-anticipated rental reversions.
  • Accretive acquisitions or redevelopment projects.


  • Prolonged slowdown in economic activity could reduce demand for retail, office space, resulting in lower occupancy and rental rates.
  • Termination of long-term leases contributing to weaker portfolio tenant retention rate.
  • Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.

Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-01-08
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.000 Same 1.000