SPH REIT - CGS-CIMB Research 2018-10-12: Improving Gradually

SPH REIT (SGX:SK6U)

SPH REIT - Improving Gradually

SPHREIT’s FY8/18 results were in line, with DPU accounting for 99.5% of our forecast.
Improvement in rental reversion and contribution from the Rail Mall are expected to be the main growth drivers in FY19 and FY20.
Lacking major catalysts. Maintain HOLD with a lower target price.

SPHREIT posted a set of in-line FY8/18 results with revenue declining 0.4% y-o-y to S$211.8m and net property income falling a slightly larger 1.2% y-o-y on the back of higher utilities, property tax and maintenance expenses. However, distributed income grew 0.8% y-o-y to S$142.3m.

FY18 DPU was 5.54 Scts versus 5.53 Scts in FY17, making up 99.5% of our forecast.
SPHREIT's balance sheet remains robust with gearing of 26.3% and stable funding cost of 2.85% as at end-4QFY18.

The drop in topline was largely due to negative rental reversion of 3.7% for the 39.4% of NLA at Paragon leased/renewed in FY18 as the leases were mostly negotiated about a year ago during the retail sales downturn. Nonetheless, the decline has moderated q-o-q due to the recovery in retail sales.
On the other hand, The Clementi Mall recorded positive rental reversion of 3% in FY18 with the renewal of 5.9% of its NLA.
Overall tenant sales continued to register growth, while its portfolio was close to full occupancy at 99.4%. We understand that luxury sector sales performance picked up significantly.

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SPHREIT has 13.7% and 70.7% of NLA due for renewal in FY19 in Paragon and The Clementi Mall, respectively. With improved retail sales sentiment, we anticipate rental reversions to continue to improve in FY19.
The high renewal rate at The Clementi Mall in FY19 also gives the REIT opportunity for reconfiguration.

The new retail zone of about 16,000 sf at Level 3 of Paragon is targeted to be launched in Nov 18. While the new retail concept will not generate immediate returns, it will help to draw in crowds, especially younger customers.
As for the The Rail Mall, the REIT has started marketing activities and analysing tenants’ sales performance. Many plans are underway to increase the attractiveness of the mall. Currently, the mall is dominated by F&B players and management intends to maintain its identity.

Despite the in-line results, we cut FY19-20 DPU forecasts by ~1% after some housekeeping exercises. We also raise our risk free rate from 2.5% to 2.6%. This reduces our DDM-based Target Price to S$1.03.
We like the niche position of its malls but it lacks major rerating catalysts. Accretive acquisitions could serve as a share price catalyst while slower-than-expected rental reversion from Paragon could be a downside risk.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2018-10-12

SGX Stock Analyst Report HOLD Maintain HOLD 1.03 Down 1.070