Sabana Shari'ah Compliant REIT - DBS Research 2019-10-25: Work In Progress

SABANA SHARI'AH COMPLIANT REIT (SGX:M1GU)

Sabana Shari'ah Compliant REIT - Work In Progress

We believe there will be an overhang on share price given concerns over SABANA SHARI'AH COMPLIANT REIT (Sabana REIT, SGX:M1GU)’s prospects as it continues to scout for a new tenant to fill the gap left at 10 Changi South Street 2. The ability to address the lease expiry tower in 2020 will bring comfort and further stability in share price.
Maintain HOLD given its lower than peer FY20-21F yield of c.5.9-6.5%.

Sabana REIT's 3Q19 gross revenue and NPI increased by 1.6% and 10.1% y-o-y, driven by improved occupancies, lower property expenses and one-off recovery of revenue relating to prior usage of property common areas. See Sabana REIT Announcements.
On a 9M19 basis, gross revenue and NPI were down 6.6% and 3.0% y-o-y due to absence of recovery of trade receivables and lower average occupancies.
Portfolio occupancy declined to 80.6% in 3Q19, down from 83.2% in 2Q19 but weighted average portfolio lease term to expiry rose to 2.8 years (2Q19: 2.4 years).
Approximately 39.7% of leases will expire in FY20, up slightly from 2Q19’s figure of 38.3%.
Going forward, a mixed bag of results may be reported with higher-spec business park assets seeing positive rental reversions and increasing occupancies but lower-spec assets experiencing the opposite.

The risk surrounding the Vibrant leases for 33 & 35 Penjuru Lane and 51 Penjuru Rd appears to be lower with net debt-equity of VIBRANT GROUP (SGX:BIP) falling sharply to 0.15x from 1.03x and only c.S$26m (prior quarter: S$167m) in borrowings due in a year or less, or on demand.
A major U.S. listed global chemical supplier has also ered into a master lease for 18 Gul Drive.

Sabana REIT ushered in a new Head of Investment & Asset Management, Ms Siow Meow Cheng, who takes over from Mr Aw Wei Been.
Ms Siow has vast experience in the Real Estate industry and has undergone stints as Head of Investments for Cambridge Industrial Trust Management and Associate Director at Colliers International.

Sabana REIT secured c.76,000 sqft of leases in 3Q19, double that of c.33,000 sqft in 2Q19.
Most of the leases are attributed to New Tech Park at 151 Lorong Chuan which is currently undergoing 2 stages of AEI.
We believe this is evident of strong demand for the property which is well-situated an enjoys a population catchment of c.40,000 residents.

Occupancy rates for Singapore industrial space in 3Q19 was up 0.2ppt y-o-y (flat q-o-q).
Similarly, the 3Q19 industrial rental index showed a mild growth of 0.1% y-o-y (flat q-o-q).

We are the only house covering the counter. That said, we have assumed more conservative occupancies in light of the uncertain trade environment.

Our DCF-based TP stays at S$0.48, which assumes WACC of 6.7% and terminal growth rate of 1%.
(see Sabana REIT Share Price; Sabana REIT Dividend History)

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2019-10-25

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.480 SAME 0.480