SPH REIT - DBS Research 2018-04-09: Turning The Corner

SPH REIT - DBS Vickers 2018-04-09: Turning The Corner SPH REIT SK6U.SI

SPH REIT - Turning The Corner

  • Operational performance turning the corner.
  • Undergeared balance sheet offers opportunities to grow inorganically.
  • Included acquisition of The Seletar Mall in our estimates.
  • Upgrade to BUY.

Operational outlook turning around; Upgrade to BUY. 

  • We see better risk-reward ratio after the SPH REIT’s recent share price correction of > 7%. 
  • SPH REIT’s portfolio has consistently outperformed retail peers, supported by sticky occupancies while negative rental reversionary trends appear to be abating with the slow turnaround in retail sales. Armed with firepower from an under-geared balance sheet and a stable yield of 5.5%, we believe that there are ample opportunities for SPH REIT to deliver earnings surprise. 
  • Upgrade to BUY, Target Price S$1.07 maintained.

Where We Differ:

Incorporated contribution from The Seletar Mall from FY19. 

  • We have included the acquisition of The Seletar Mall with contribution to start from FY19, whereas the market does not appear to have factored this in the estimates. With the manager indicating that they remain keen to pursue inorganic growth opportunities in Singapore and Australia, the REIT’s low cost of capital and ample debt capacity enable the REIT to deliver earnings accretion when such deals are executed.

Potential catalyst: 

Earlier than projected acquisition or higher debt financed acquisition. 

  • We estimated the acquisition cost of The Seletar Mall to be S$500m and funded by 30/70 of equity/debt, while pushing the aggregate leverage of the REIT to 32% from the current 26%. 
  • Nevertheless, given the REIT’s low gearing, we do not exclude the possibility of a higher debt-funded acquisition which should lift share price up further.


  • Maintain DCF-backed Target Price of S$1.07. The stock offers a total return of 12%. With more confidence of an improved operating outlook coupled with an acquisition upside, we see better risk-reward ratios at current levels. Upgrade to BUY.

Key Risks to Our View

  • Timing and price of The Seletar Mall acquisition. We have factored in contributions from The Seletar Mall from FY19F.
  • Later-than-projected timeline or higher purchase price implies downside to our estimates.

WHAT’S NEW - Turning Around 

Revenues remain flattish: 

  • SPH REIT’s 1H18 revenues and net property income (NPI) grew by 0.5% and 0.8% y-o-y at S$107.0m and S$84.5m respectively, in line with expectations. 1H18 earnings formed 50% of our estimates.
  • The improvement in 1H18 NPI was largely driven by Clementi Mall which reported a 5.6% increase, while Paragon’s NPI dipped by 0.7%. Interest costs were fairly stable.
  • On a q-o-q basis, 2Q18 NPI dipped by 1.1%, largely due to the impact of negative rental reversions at Paragon while higher utility costs impacted margins.
  • 1H18 distributable income was 1.4% lower at S$72.6m (2Q18 dipped by 3.3% to S$36.1m). DPU of 1.4 Scts for the quarter was flat compared to a year ago on a higher payout ratio (99.6% in 2Q18 vs 95.8% a year ago).

Improvement in debt expiry profile. 

  • SPH REIT has refinanced its loan tranche of S$135m for another 4 years, pushing its average term to maturity to 2.2 years. The manager is looking to refinance the S$185m loan that is due in 2018. 
  • Average cost of debt remained stable at 2.84% and is unlikely to increase significantly.

Operational outlook bottoming out: 

  • The portfolio maintained its track record of full occupancy. While 1H18 rental reversion was negative at -7.1% (Paragon -7.1%, Clementi Mall -2.5%), it was an improvement from the 10.6% drop a quarter ago. 
  • Management is sensing positive vibes from its retailers with positive tenant sales growth, in tandem with the uptick in retail sales since the middle of 2017. With expectations of higher tourist arrivals in 2018, we believe that the worst for the malls could potentially be over.

Upside from acquisitions not priced in by investors. 

  • SPH REIT’s gearing has been conservative at c.26%, one of the lowest amongst the S-REITs and with visibility of a pipeline asset (The Seletar Mall), the REIT has the financial capacity to acquire and grow distributions. 
  • The manager alluded to possibly looking overseas (Australia) for acquisitions but remains disciplined for the right opportunity (yield accretive and sustainable earnings trend) and at the right price.

Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2018-04-09
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