Singapore Press Holdings - CGS-CIMB Research 2018-09-12: Defensive Investing In Student Housing

SGinvestors.io

SINGAPORE PRESS HLDGS LTD SGX:T39

Singapore Press Holdings - Defensive Investing In Student Housing

• SPH acquired S$321m of UK PBSA assets; portfolio decent with 6.3% net initial yield and adjustment mechanisms for downside protection.
• Acquisition offers an estimated 6% accretion to FY17 core earnings, and increases net gearing slightly to 0.41x, based on our forecasts.
• We believe media rejuvenation is still a priority for SPH, with cash-yielding assets as its new growth engine.
• We expect more acquisitions to come for greater scale. Retain ADD with unchanged EPS forecasts and Target Price. The stock offers 10.8% upside including 5.5% yield.

Buying into defensive, cash-yielding assets

• SPH announced it has purchased a portfolio of purpose-built student accommodation (PBSA) from Unite Group, UK’s largest manager and developer of PBSA.

~ SGinvestors.io ~ Where SG investors share

• The cash onsideration of S$321m (£180m) is close to its market value as at 31 Jul 2018, based on a Cushman & Wakefield valuation report, and reflects 6.3% net initial yield. Assuming 60% debt financing (onshore) at 4% interest cost, this translates to c.9.6% cash on cash returns, in line with management’s initial target. ~SGinvestors.io ~SGinvestors.io ~ Where SG investors share

Adjustment mechanisms overlooked; c.6% EPS accretion

• The sale and purchase agreement also includes
  1. a rent guarantee capped at S$4.4m (£2.5m) for any potential shortfall as at 30 Nov 2018, and
  2. rental income adjustment of up to S$24.4m (£13.7m) on the cash consideration if the actual income falls below 95% of the estimated income for these assets.
• ~SGinvestors.io ~SGinvestors.io ~ Where SG investors share
• SPH estimates the acquisition will add about S$12m (c.6%) to its FY17 core earnings. Net gearing could increase from 0.33x (as at end-3Q18) to 0.41x, based on our forecasts.

Diversified PBSA exposure

• The acquired PBSA portfolio of 3,436 beds are located in 14 buildings (10 freehold, four leasehold) across six UK towns/cities, with the biggest exposure in Plymouth (32% of beds). According to JLL’s 2017 report, Plymouth faces chronic undersupply with only 20- 30% of PBSA relative to its student number.
• We expect a weaker Sterling and Article 4 enforcement (council restriction on change of use from homes to houses in multiple occupation, HMO) to underpin demand for UK overseas study and PBSA, respectively.

Leveraging on professional management

• SPH has also entered into an operating management agreement for these assets with Victoria Hall, a UK professional operator of student accommodation with 21 years of sector experience.
• Post its restructuring, and new hires and appointments of executives, we believe SPH’s management team has been reinforced and that the rejuvenation of its media business remains a priority for the group, even with its overseas expansion.

More acquisitions to come, maintain ADD

• We maintain our FY19-20F forecasts for now, as we have earlier factored in S$500m asset acquisition by the end of FY19F, with expected profit contribution of S$10.4m (including interest expenses). We expect SPH to make further acquisitions to build greater scale in the UK.
• We maintain our ADD call, with our SOP-based Target Price of S$2.88 and 5.5% forecasted dividend yield.
• Downside risks to our Add call are poor ad revenue and weak overseas execution.

NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2018-09-12

SGX Stock Analyst Report ADD Maintain ADD 2.880 Same 2.880