SPH REIT - CIMB Research 2018-04-06: Lessening Drag From Paragon

SPH REIT - CIMB Research 2018-04-06: Lessening Drag From Paragon SPH REIT SK6U.SI

SPH REIT - Lessening Drag From Paragon

  • SPH REIT's 2Q and 1HFY18 DPU were within our FY18 projections.
  • Decelerating negative reversion at Paragon.
  • Significant debt headroom for inorganic growth opportunities.
  • Maintain HOLD with unchanged Target Price of S$1.06.

2QFY18 highlights 

  • SPHREIT posted a set of in-line 2QFY8/18 results with revenue declining 0.8% y-o-y to S$53.6m and net property income dipping by a slightly larger 1.1% y-o-y on the back of higher utilities cost. However, distributable income grew 0.6% y-o-y to S$35.9m (DPU: 1.4 Scts) with a smaller 0.4% of income retained (vs. 4.2% retention rate previously). 
  • For 1HFY8/18, DPU of 2.74 Scts made up c.49% of our FY18 forecast.

Lessening negative reversion drag at Paragon 

  • The drag on topline was largely due to negative rental reversion of -7.1% for the 20.5% of NLA at Paragon that was leased/renewed in 1HFY18 as these leases were negotiated about a year ahead of expiry. Nonetheless, the 7.1% decline is better than the -10.6% experienced in 1QFY18. 
  • While The Clementi Mall also saw a -2.5% decline in renewal rates due to a change in the trade mix, only a small 1.4% of NLA was re-leased. 
  • On a portfolio basis, the average negative rental reversion also came in at -7.1%.

An estimated 30% of NLA due for renewal in 2HFY18-FY19 

  • SPHREIT has a further 8.2% of NLA due to be renewed in 2HFY18 and another 21% in FY19, the bulk of which will come from Paragon. With the improved retail sales sentiment in Singapore and improved economic outlook, we anticipate the performance of renewal rents will likely be better than the -7.1% reported in 1HFY18. 
  • Meanwhile, the trust is taking the opportunity to refresh its properties by conducting selective AEI at Paragon. This should encourage tenant stickiness in the medium term.

Lowest-geared S-REIT, significant debt headroom for acquisitions 

  • Its balance sheet remains robust with gearing of 25.4% and stable funding cost of 2.84% as at end-2QFY18. It has a remaining S$185m of loans to be rolled over for the remainder of this FY. Management indicated that it continues to review both third-party and ROFR properties in Singapore as well as Australia for inorganic growth opportunities.
  • Based on gearing of 35-40%, we estimate the trust has debt headroom of c.S$490m800m.

Maintain HOLD

  • We leave our FY18-20 DPU estimates unchanged and retain our-DDM-based Target Price of S$1.06. We continue to like Paragon and The Clementi Mall for their niche positioning in their micro-markets. 
  • We view new and accretive acquisitions as potential share price catalysts. Hence, we retain our HOLD rating for now. SPHREIT offers investors FY18 DPU yield of c.5.6%. 
  • Downside risks include protracted downturn in the retail sector which could result in a prolonged period of negative rental performance.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-04-06
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.060 Same 1.060