SPH REIT - CGS-CIMB Research 2018-07-10: 3QFY18 Less Drag From Paragon

SPH REIT - CGS-CIMB Research 2018-07-10: 3qfy18: Less Drag From Paragon SPH REIT SGX:SK6U

SPH REIT - 3QFY18: Less Drag From Paragon

  • SPHREIT's 3Q and 9MFY18 DPU were within expectations.
  • Smaller negative rental reversion at Paragon in 3QFY18.
  • Strong balance sheet provides room for inorganic acquisitions.
  • Maintain HOLD with unchanged Target Price of S$1.07.

3QFY18 highlights

  • SPHREIT posted a set of in-line 3QFY8/18 results with revenue declining 2.9% y-o-y to S$51.8m and net property income falling a slightly larger 3.8% y-o-y on the back of higher utilities cost. However, distributable income grew 0.6% y-o-y to S$35.2m (DPU: 1.37 Scts) with no cash retained (vs. 2% retention rate in 3QFY17).
  • For 9MFY8/18, DPU of 4.11 Scts made up c.74% of our FY18 forecast. This research report is shared at SGinvestors.io.

Smaller negative reversion drag at Paragon

  • The drop in topline was largely due to negative rental reversion of -6.2% for the 27.3% of NLA at Paragon leased/renewed in 9MFY18 as the leases were mostly negotiated about a year ago during the retail sales downturn. Nonetheless, the decline moderated in 3Q vs. 1HFY18.
  • On the other hand, The Clementi Mall recorded positive rental reversion of 5.3% in 9MFY18 with the renewal of 3.2% of its NLA. Average rental reversion came in at -6% in 9MFY18. 
  • In tandem with the recovery in retail sales since Jun 2017, overall tenant sales continued to register growth, while portfolio was close to full occupancy at 99.6%.

Continual asset enhancement to improve yield

  • SPHREIT has 3.7% of NLA due for renewal in the remainder of FY18 and another 21% in FY19, the bulk of which will come from Paragon. With improved retail sales sentiment and economic outlook in Singapore, we anticipate the rental reversions in 4QFY18F to be better than the -6% reported in 9MFY18.
  • Meanwhile, the trust is taking the opportunity to refresh its properties by conducting selective asset enhancement initiatives (AEI) at Paragon; phase 1 of the mall's new retail zone of about 16,000 sf at Level 3 was launched in Jun. The new retail concept should help to boost the mall's attractiveness. This research report is shared at SGinvestors.io.

Robust balance sheet provides room for acquisitions

  • SPHREIT's balance sheet remains robust with gearing of 25.4% and stable funding cost of 2.84% as at end-3QFY18. It has a remaining S$185m of loans to be rolled over for the remainder of FY18.
  • Management indicated that it continues to review both third-party and right of first refusal (ROFR) properties in Singapore as well as Australia for inorganic growth opportunities. Given its strong balance sheet, SPH has a lot of debt room for acquisitions. This research report is shared at SGinvestors.io.

Maintain HOLD

  • We leave our FY18-20 DPU estimates unchanged and retain our DDM-based Target Price of S$1.07 as well as our HOLD rating.
  • We continue to like Paragon and The Clementi Mall for their niche positioning in their micro markets.
  • New and accretive acquisitions should serve as potential share price catalysts.
  • Downside risks include protracted downturn in the retail sector which could result in a prolonged period of negative rental performance.

LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-10
SGX Stock Analyst Report HOLD Maintain HOLD 1.070 Same 1.070