ASCOTT RESIDENCE TRUST (SGX:A68U)
CDL HOSPITALITY TRUSTS (SGX:J85)
FRASERS CENTREPOINT TRUST (SGX:J69U)
PARKWAYLIFE REIT (SGX:C2PU)
CAPITALAND COMMERCIAL TRUST (SGX:C61U)
REITs – Singapore - Potential Cut In Interest Rates If Trade Conflict Escalates
- The FED will closely monitor the implications of trade negotiations and will act appropriately to sustain economic expansion. Yield for 10Y government bonds receded by 56bp to 2.12% in the US but remained unchanged at 2.04% in Singapore during 1H19.
- Our sensitivity analysis indicates that target prices of S-REITs will rise 5.1% for a 25bp drop in RFR.
- Maintain OVERWEIGHT.
WHAT’S NEW
- We have been bullish on S-REITs since our update “Singapore REITs - Central Bankers Tilting Toward More Dovishness; Buy REITs” dated 28 Jan 19.
- Our recent recommendation upgrades to BUY for ASCOTT RESIDENCE TRUST (SGX:A68U), CAPITALAND MALL TRUST (SGX:C38U) and FRASERS CENTREPOINT TRUST (SGX:J69U) were also timely as these stocks have gained 4.5%, 5.8% and 5.0% respectively since our upgrades. See report:
- Ascott Residence Trust - UOB Kay Hian 2019-04-12: Creating Value By Recycling Capital
- CapitaLand Mall Trust - UOB Kay Hian 2019-05-27: Beneficiary Of Jurong Lake District; Funan Coming On Stream In Jun 19; Upgrade To BUY
- Frasers Centrepoint Trust - UOB Kay Hian 2019-05-23: Beneficiary Of Northern Gateway, Adding Depth To Suburban Retail; Upgrade To BUY
Jerome Powell: The Fed will respond appropriately.
- Fed Chairman Jerome Powell made opening remarks at the Conference on Monetary Policy Strategy, Tools and Communications Practices on 4 Jun 19. He devoted one paragraph of his 10-page speech to trade negotiation. He said the Fed does not know how or when the trade negotiations will be resolved. However, the Fed is closely monitoring the implications and will act appropriately to sustain the economic expansion.
- The futures market has signalled a probability of 20% for a rate cut at the FOMC meeting on 18-19 June. The probability for at least one rate cut by the FOMC meeting on 30-31 July has increased to 70%.
The bond market signals a slowdown.
- In the US, the yield curve has shifted parallel lower during 1H19, reflecting expectations of slower economic growth and lower inflation over the longer term. The inversion at the short-end of the yield curve has worsened during 1H19. However, the 2Y-1Y yield spread recovered slightly from -28bp to -16bp last week.
- In Singapore, long-term interest rates, including the 10Y government bond yield (2.04%), remain relatively unchanged. The inversion at the short-end of the yield curve has worsened. Yield for 2Y government bonds has dropped 19bp to 1.73% so far in 2Q19. The 2Y-1Y yield spread worsened from -15bp to -33bp last week.
Dark clouds hang over G-20 Summit.
- There are the following obstacles:
- President Donald Trump said in his State of the Union address in early February that the trade deal with China must include real structural changes to end unfair trade practices, so as to reduce chronic trade deficit and protect American jobs. Such structural changes include ending of subsidies for state-owned enterprises, which would be difficult for the Chinese to stomach. Another thorny issue is enforcement and verification.
- President Trump said he will make the decision on whether to impose tariffs on the remaining US$325b of imports from China after meeting President Xi Jinping at the G-20 Summit, which will be held on 28-29 Jun 19 in Osaka, Japan. If implemented, essentially all imports from China into the US would be subject to a 25% tariff.
- Former Secretary of State Rex Tillerson has warned that China may give up on trade talks with the US.
ACTION
Maintain OVERWEIGHT.
- REITs provide stable and recurrent income. They are defensive due to long weighted average lease expiry (WALE). In this respect,
- PARKWAYLIFE REIT (SGX:C2PU) (6.9 years),
- CAPITALAND COMMERCIAL TRUST (SGX:C61U) (5.7 years) and
- KEPPEL REIT (SGX:K71U) (5.9 years)
- Our top BUYs are hospitality REITs ASCOTT RESIDENCE TRUST (SGX:A68U) (Target price: S$1.46) and CDL HOSPITALITY TRUSTS (SGX:J85) (Target price: S$1.99), followed by retail REIT FRASERS CENTREPOINT TRUST (SGX:J69U) (Target price: S$2.71). We also like CAPITALAND COMMERCIAL TRUST (SGX:C61U) (Target price: S$2.16) and PARKWAYLIFE REIT (SGX:C2PU) (Target price: S$3.25).
Sensitivity analysis.
- Our sensitivity analysis indicates our target prices for S-REITs would increase by 5.1% for a 25bp drop in risk-free rate (RFR).
SENSITIVITY ANALYSIS – TARGET PRICES VS RFR
| -50 bp | -25 bp | 0 bp | 25 bp | 50 bp | |
|---|---|---|---|---|---|
| Healthcare | |||||
| PARKWAYLIFE REIT (SGX:C2PU) | $3.69 | $3.45 | $3.25 | $3.05 | $2.88 |
| Hospitality | |||||
| ASCOTT RESIDENCE TRUST (SGX:A68U) | $1.63 | $1.54 | $1.46 | $1.39 | $1.33 |
| CDL HOSPITALITY TRUSTS (SGX:J85) | $2.22 | $2.10 | $1.99 | $1.89 | $1.80 |
| Industrial | |||||
| ASCENDAS REIT (SGX:A17U) | $3.25 | $3.13 | $3.01 | $2.90 | $2.80 |
| MAPLETREE LOGISTICS TRUST (SGX:M44U) | $1.50 | $1.44 | $1.39 | $1.34 | $1.29 |
| Office | |||||
| CAPITALAND COMMERCIAL TRUST (SGX:C61U) | $2.45 | $2.30 | $2.16 | $2.04 | $1.93 |
| KEPPEL REIT (SGX:K71U) | $1.53 | $1.43 | $1.37 | $1.27 | $1.20 |
| SUNTEC REIT (SGX:T82U) | $2.23 | $2.10 | $1.99 | $1.89 | $1.80 |
| Retail | |||||
| FRASERS CENTREPOINT TRUST (SGX:J69U) | $2.99 | $2.84 | $2.71 | $2.58 | $2.47 |
| CAPITALAND MALL TRUST (SGX:C38U) | $2.94 | $2.79 | $2.65 | $2.52 | $2.41 |
SECTOR CATALYSTS
- Interest rates are expected to drift sideways in the foreseeable future.
- Limited new supply for office, hotel and logistics segments in 2019 and 2020.
ASSUMPTION CHANGES
- We keep our earnings forecast unchanged.
RISKS
- Uncertainties from US-China trade conflict.
Jonathan KOH CFA
UOB Kay Hian Research
|
Peihao LOKE
UOB Kay Hian
|
https://research.uobkayhian.com/
2019-06-10
SGX Stock
Analyst Report
1.460
SAME
1.460
1.990
SAME
1.990
2.710
SAME
2.710
3.250
SAME
3.250
2.160
SAME
2.160
