SPH REIT - Maybank Kim Eng 2019-04-08: Stable Quarter, Awaiting Deals

SPH REIT (SGX:SK6U)

SPH REIT - Stable Quarter, Awaiting Deals

SPH REIT (SGX:SK6U)'s 2Q19 DPU was in line with consensus and our estimates, up 0.7% y-o-y to SGD1.41cts, bringing 6M19 to 49% of our full year est.
SPH REIT’s AUM has expanded on its first overseas deal. While we expect a recovery in prime Orchard Road rents due to tight supply supporting further positive rental reversions at Paragon, the sales growth outlook for its tenants could be capped by falling tourism shopping receipts.
We remain selective on retail REITs and expect larger-destination malls (VivoCity) to do better. Investors need patience as there is limited visibility on its long-discussed potential Seletar Mall deal. Reiterate HOLD with DDM-based Target Price of SGD1.05 (COE 6.8%, LTG 1.5%).

We like FRASERS CENTREPOINT TRUST (SGX:J69U) (Rating: BUY, Target Price SGD2.60) for its suburban-mall footprint and 6.0% 3-year DPU CAGR. See also report: Singapore REITs - Patience Rewarded.

SPH REIT's revenue and NPI both rose 8.5% y-o-y in 2Q19 with the contribution from acquisitions – Rail Mall (completed on 28 Jun 2018) and an 85% interest in Figtree Grove (21 Dec 2018). This helped mitigate the flat revenue and NPI growth at Paragon and Clementi Mall. Its portfolio occupancy remained high at 99.2%, while overall tenant sales growth was driven by a 3.4% y-o-y improvement in shopper traffic in 1H19 (versus +3.6% y-o-y in 1Q19).
SPH REIT reported a +8.4% portfolio rental reversion across its three Singapore malls, led by Paragon at +8.6% with 61 leases contributing 15% of its NLA renewed, Clementi Mall at +5.0% and Rail Mall at +6.2%, on the back of improving tenant sales.
We forecast rents to rise by 3-5% in FY19-20E at Paragon given tight Orchard Road supply.

SPH REIT's balance sheet remains sound, even as aggregate leverage increased from 26.3% to 30.1% as of end-Feb 2019, and average cost of debt rose slightly from 2.80% to 2.88% largely due to AUD-denominated borrowings.
AUM increased by 6.2% h-o-h due to two deals, including its first overseas asset, but we believe investors are awaiting more sizeable acquisition growth opportunities given an almost SGD1b in debt headroom. Seletar Mall remains its key potential sponsored deal in Singapore; it could add 7-10% to FY19-20 DPU, assuming a 100% interest and fully debt-funded.
Also, gearing is low vs peers.

Earlier-than-expected pick-up in leasing demand for retail; office space driving improvement in occupancy.
Better-than-anticipated rental reversions.
Accretive acquisitions or redevelopment projects.

Prolonged slowdown in economic activity could reduce demand for retail and office space, resulting in lower occupancy and rental rates.
Termination of long-term leases contributing to weaker portfolio tenant retention rate.
Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-04-08

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.050 SAME 1.050