Sabana Shari'ah Compliant REIT - DBS Research 2019-09-11: Navigating A Sharp Bend


Sabana Shari'ah Compliant REIT - Navigating A Sharp Bend

  • Sabana REIT's prospective FY20F-21F yields of 5.9-6.5% at the lower end of peers’ range.
  • Potential takeover target with c.1.56m sqft of untapped GFA which can be unlocked over time.
  • Cloudy outlook over 19.5% of leases (by NLA) expiring in FY19F/20F post Vibrant exit.
  • Initiate with HOLD and Target Price of S$0.48.

Risk-reward appears unexciting for now.

  • We believe that the uncertainty surrounding 33 & 35 Penjuru Lane, 18 Gul Drive and 51 Penjuru Road currently master-leased to Vibrant Group (SGX:BIP) has heightened post the divestment of its stake in Sabana REIT.
  • While the AEI at 151 Lorong Chuan is set to anchor a recovery in earnings from FY20F, it could be weighed down by vacancies in these Vibrant-backed properties, which we project could cut FY21F DPU by up to 15.1% to 2.54 Scts (implying FY21F yield of 5.7% vs 6.5% currently).

About Sabana Shari'ah Complient Industrial REIT

Corporate History.

  • SABANA SHARI'AH COMPLIANT REIT (Sabana REIT, SGX:M1GU) was established primarily to invest in industrial real estate in Asia while adhering to Shari’ah investment principles. Based in Singapore, Sabana REIT was listed on the Singapore Exchange on 26 November 2010.
  • In 2018, Mr Donald Han took over as CEO of Sabana REIT. Since then, the group has embarked on a refreshed strategy spread over 3-phases. Phase 1 focuses on the divestment of non-performing and mature assets. Phase 2 concentrates on undertaking asset enhancement initiatives (AEI) and Phase 3 emphasises the making of yield-accretive acquisitions. As of 2Q19, Sabana REIT is between Phase 1 and 2 with the company seeking to divest 1 Tuas Avenue 4 and announcing an AEI for 151 Lorong Chuan.
  • Compared to other mid-cap industrial S-REITs, Sabana REIT is unique for its Shari-ah compliant certificate, which was awarded by an Independent Shari’ah Committee consisting of Malaysian and Saudi Arabian Islamic scholars. As such Sabana REIT complies with Shari’ah investment principles and procedures that include a prohibition on sale of tobacco-related products by tenants and a requirement for audit by a Shari’ah Advisor.
  • Sabana REIT’s investments comprise four main segments, High-tech Industrial, Chemical Warehouse & Logistics, Warehouse & Logistics and General Industrial. The High-tech Industrial and Warehouse & Logistics segments are the largest contributors to Sabana REIT’s 2018 top and bottom line with the former constituting 55.9% of revenue and 47.0% of net property income, and the latter constituting 26.2% of revenue and 30.8% of net property income.
  • Since its listing, Sabana REIT has grown its portfolio of properties from an aggregate gross floor area (“GFA”) of 3,286,220 sqft to 4,106,105 sqft as of 2Q19. The group’s portfolio of 18 companies are all situated in Singapore and leased to a tenant base of 109 tenants.
  • Diversified asset exposure*.
  • Sabana REIT has actively sought to reduce risks by diversifying its tenant base. As of 2Q19, Sabana REIT is diversified with no single end-sector leasing more than 16% of total portfolio net leasable area (NLA). Within the tenant base, the Logistics sector (15.6%) and the Electronics sector (14.8%) are the two largest lessees. This is an improvement when compared to the Group’s tenant base as at listing in September 2010 where three end-sectors each leased more than 16% of portfolio NLA. In contrast, Sabana REIT is focused on Warehouse & Logistics and Hi-tech, which constitute 38.7% and 36.7% of portfolio GFA respectively.
  • Similarly, the 151 Lorong Chuan property constitutes a large portion of Sabana REIT’s business with the property contributing at least 25.1% of the group’s gross revenue in FY18. In view of this, Sabana REIT has taken measures to address the concentration in revenue. The group is in the midst of undertaking an asset enhancement initiative to add 42,837 sqft of new retail and F&B GFA to 151 Lorong Chuan which has been dubbed the “Crown Jewel: New Tech Park”, of Sabana REIT.
  • See Sabana REIT's portfolio details in attached 25-page PDF report.

Investment Summary

Initiate with HOLD; DCF-based Target Price of S$0.48 implies prospective c.10% return.

  • At current Sabana REIT share prices, we believe that a HOLD recommendation for Sabana REIT is fair given prospective FY20F-21F yields of 5.9-6.5%, which fall at the lower end of mid-cap Industrial S-REITs’ peer range.
  • While several company-specific factors have helped to raise Sabana REIT’s profile amongst investors in recent quarters, it could remain range-bound for now given near-term earnings hurdles, which we believe needs to be addressed before a more sustainable share price re-rating can kick in.
  • A potential takeover or merger will be upside to our base case assumptions

Upcoming master lease expiries cast doubt over sustainability of rents as industrial outlook continues to bottom out.

  • Improving supply-demand dynamics in the industrial space generally augur well for occupancy and rents. Sabana REIT, however, appears to be largely supported by master leases, which represented c.33.6% of portfolio NLA in 2Q19.
  • We note that a number of these master-leased properties (18 Gul Drive, 33 & 35 Penjuru Lane and 51 Penjuru Road) were leased back to the Sponsor, Vibrant Group, which divested its entire stake in the REIT.
  • Vibrant Group’s lease terms are due to expire in 2019/2020, which coupled with higher pipeline supply of factory spaces in the coming years (i.e. 822,000 sqm of multi-user factory space incoming in FY20), could place downward pressure on occupancy and rents, especially given the specialised and purpose-built nature of some of these properties.

But proposed S$20m AEI at Lorong Chuan could help set the wheels of recovery in motion.

  • Sabana REIT recently announced AEI plans for its crown jewel, New Tech Park at 151 Lorong Chuan, which is expected to yield an additional 34,900 sqft of commercial space. The proposed AEI will be implemented in phases, with the first stage mainly involving works on the first floor – primarily for F&B and lifestyle amenities (including a gym and supermarket) and is scheduled for completion in 2Q20. The second stage will pertain mainly to F&B works on the second floor, with targeted completion in 4Q20.
  • The well-situated property currently enjoys direct connectivity to Lorong Chuan MRT station, a population catchment of c.40,000 residents, several education facilities such as Nanyang Junior College within a 1km radius (or 5-10 minutes’ walk) and is also home to Hope Church’s Northeast Centre. Given the unique characteristics of its local catchment, we believe the strategic addition of these new lifestyle concepts should help sustainably drive higher footfall, enhancing the vibrancy and positioning of New Tech Park over time.
  • Meanwhile, disruptions to existing tenancies are likely to be minimal. In fact, Sabana REIT’s ability to secure two new leases that will commence in 4Q19 (amidst the AEI) reflects a strengthening of demand for the property. Coupled with the new additional quality space, we believe that leasing momentum can be sustained and GRI could be boosted by cS$3.9m in FY21F, according to our estimates.

Treasure trove of untapped GFA waiting to be unlocked.

  • Aside from 151 Lorong Chuan, where further unutilised GFA remains, we have identified seven other properties within Sabana REIT’s portfolio with GFA upside. According to URA’s Masterplan 2014, these assets have plot ratios that have yet to be maximised and may be ripe for enhancement/ redevelopment as Sabana REIT embarks on Phase 2 of its growth strategy.
  • Taking the example of the AEI at 151 Lorong Chuan, we believe the group is likely to favour incremental improvements/enhancements over complete redevelopments in its approach to AEI. While upside potential may be deemed less attractive as compared to full redevelopments, progressive AEI could be a more cost-effective method to enhancing value in our opinion, given current capital constraints.
  • In a bull-case redevelopment scenario that assumes the
    1. maximisation of plot ratios,
    2. higher rents after the AEI,
    3. NPI margins of between 65% and 80% for multi-tenanted buildings,
    4. NPI margins of between 80% and 90% for master-leased buildings, and
    5. capitalisation rates of between 6.25% and 6.75%,
    we obtained a result showing a potential c.S$36.3m and 44.8% uplift to FY18 GRI and portfolio value respectively. This positive result has yet to be factored into our stimates and Target Price.

Timing of further AEI/redevelopment remains uncertain, but M&A can also help to crystallise value.

  • While we see embedded value in Sabana REIT’s portfolio, this is subject to the Manager’s ability to capitalise on AEI opportunities within the confines of its development and leverage limits of 10% and 45% respectively. As such, with resources currently channelled towards 151 Lorong Chuan, it could take some time before the REIT embarks on further value-unlocking opportunities, if at all.
  • Meanwhile, M&A may also be a viable means of unlocking shareholder value as the group’s significantly underutilised GFA places the REIT favourably as a potential takeover target. In 2018, Viva Industrial Trust (SGX:T8B) successfully merged with a unit of a global logistics platform at an acquisition price of 96 Scts – a c.26.3% and c.7.9% premium to NAV and last traded price prior to the announcement respectively. Mr Tong Jinquan, a Chinese billionaire who had a c.44.2% stake in Viva Industrial Trust pre-merger, has also accumulated a c.6.5% stake in Sabana REIT.
  • Moves to acquire a 51% stake in the Manager of Sabana REIT and an additional 9.9% interest in Sabana REIT from Vibrant Group (Sponsor) in May 2019, have allowed the global logistics platform in question to amass an indirect 93.8% and 21.4% interest in the Manager and REIT respectively – leading to market speculation that Sabana REIT may soon follow suit in Viva Industrial Trust’s footsteps.
  • Should a takeover materialise, Sabana REIT may see offers coming in at or north of its current NAV of 56 Scts (as at 2Q19). While this implies potential upside of at least 24%, it has yet to be priced into our forecasts as we believe that concerns over the impending expiry of Vibrant Group-held master leases may continue to weigh on investors’ minds and share price performance over the medium term.


Initiate with HOLD and DCF-based Target Price of S$0.48.

  • Given Sabana REIT’s strong cash flow generation ability, we believe that the discounting of Sabana REIT’s cash flows would be an appropriate valuation methodology.
  • Our DCF model assumes a risk-free rate of 2.5%, market return of 9.4%, beta of 0.8x, target gearing of 35% and cost of debt at 4.2%, which translates into a WACC of 6.7%. Coupled with a terminal growth rate of 1%, we derive an equity value of S$505.1m or a Target Price of S$0.48. At current prices, this implies FY20F-21F yield of 5.9-6.5. See attached PDF report for details.
  • We have also imputed c.S$20m of capex over FY19F-20F for the AEI at 151 Lorong Chuan, which should translate positively into GRI and cash flows from 2H20.
  • We have yet to impute the potential development of additional GFA available into our estimates. Incorporating the full built-up area of the portfolio GFA implies RNAV of S$0.67 (c.20% upside to current NAV).

See attached 25-page PDF report for complete analysis on Sabana REIT's financial statement, critical factors key risks and valuation details.

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2019-09-11
SGX Stock Analyst Report HOLD INITIATE HOLD 0.48 SAME 0.48