SPH REIT - OCBC Investment 2019-10-14: Eyeing Acquisition Opportunities

SPH REIT (SGX:SK6U) | SGinvestors.io SPH REIT (SGX:SK6U)

SPH REIT - Eyeing Acquisition Opportunities

  • Positive portfolio rental reversions.
  • Gearing remained low at 27.5%.
  • Acquisition could be the near-term catalyst.

SPH REIT Investment thesis

  • SPH REIT (SGX:SK6U) offers investors exposure to the prime Orchard Road shopping belt and suburban retail market via its interests in Paragon and The Clementi Mall, respectively. Paragon is a premier upscale retail mall with medical suites and office component, while The Clementi Mall is located at an established residential catchment area with well-connected transport nodes.
  • SPH REIT also acquired The Rail Mall in Jun 2018 located at Upper Bukit Timah Road, and made its maiden acquisition overseas in Australia in Dec 2018.

FY19 results were in-line –

  • SPH REIT (SGX:SK6U) reported 4QFY19 results which were in-line with our expectations. Gross revenue grew by S$5.4m, or 10.2% y-o-y to S$58.4m and net property income (NPI) increased by S$4.8, or 11.8% y-o-y to S$45.8m, making up 101% of our full-year estimates. Gross revenue for FY19 was S$228.6m, an increase of S$16.8m, or 7.9% y-o-y from FY18. NPI reported a growth of S$13.8m, or 8.3% y-o-y to S$179.8m in FY19.
  • The increase in gross revenue and NPI was mainly contributed by the acquisitions of The Rail Mall and Figtree Grove Shopping Centre which were acquired in 2018. FY19 DPU reported record a growth of 1.1% y-o-y to 5.60 S cents.

Healthy operating metrics –

  • Overall committed occupancy remained strong at 99.1%. SPH REIT’s 3 assets in the Singapore portfolio (~95% of gross revenue) continued to register high occupancy rate of 99.1% and positive rental reversions of 9.4% on the back of higher visitor traffic and tenant sales.
  • For Paragon, its rental reversions were +9.7%, or 26.6% of NLA. For The Clementi Mall and The Rail Mall, the rental reversions came in at +5.0% and +9.4% respectively, representing 10.7% and 23.5% of the property’s NLA. For Figtree Grove Shopping Centre (~5% of gross revenue), its occupancy remained high at 99.2% with negative rental reversion of 2.7% in FY19.
  • Overall, the portfolio rental reversion was +8.4% in FY19 as compared with +11.9% in FY18.

Waiting for acquisition opportunities –

  • Gearing ratio improved from 30.1% in 3QFY19 to 27.5%, on the back of recent issuance of the S$300m perpetual securities at a fixed coupon rate of 4.1% p.a.
  • Recall that SPH REIT established a S$1.0b debt issuance programme in Aug 2019 which we believe could be used to fund potential acquisitions. According to the management, SPH REIT is currently conducting due diligence on a potential acquisition and part of the net proceeds from the issuance of securities under the programme may be used to fund the acquisition. However, the discussions are preliminary and there is no assurance that any deal will eventually materialise.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2019-10-14
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.10 UP 1.050