Singapore Press Holdings (SPH) - UOB Kay Hian 2020-03-26: COVID-19 Impact On UK Accommodation Assets

SINGAPORE PRESS HLDGS LTD (SGX:T39)

Singapore Press Holdings (SPH) - COVID-19 Impact On UK Accommodation Assets

UK universities have stepped up precautionary measures in their fight against COVID-19, with some international students returning back to their home countries as the virus situation worsens.
The challenge ahead for SPH (SGX:T39) lies in sales for the new academic year although the asset class remains fairly attractive.

Maintain BUY with a lower target price of S$2.04, factoring the sell-down from the group’s REIT holdings.

Various UK universities have suspended classroom lessons up to Easter although some campuses and residence halls remain open. Countries have also seen a return of overseas students such as in Singapore where the Ministry of Foreign Affairs has issued recall advisories and suspended all official overseas placements until Jul 20.
Singapore Press Holdings (SPH) has a sizeable asset base of purpose built student accommodation (PBSA) in the UK.

Currently, accommodations are likely locked in until the end of the semester in May/Jun 20 although some PBSA have allowed for refunds in the last term (mid-April to May/Jun). Summer accommodation will also be the most directly affected, while new sales for the new semester (from Aug 20) are the main concern.
According to a 16 March press release by Unite Group, one of the largest UK PBSA owners with a bed count of about 74,000, reservation rate for the new academic year (AY) in Aug 20 is at 77% (77% at the same time last year). Student applications (as of Jan 20) for the new AY have been fairly resilient, up 1.2% y-o-y with strong growth from international students from China and India.
Separately, SPH had also recently announced that its agreement to acquire the portfolio of six senior housing properties in Canada has been terminated in light of the global market instabilities from COVID-19. The group will likely incur professional and admin fees from the process. We still expect the group to make acquisitions in defensive-yielding assets to grow its recurring income.

According to the Higher Education Statistics Agency, among full-time students in 2019, about 24% (0.45m) are international students while about 40% either stay at a parental/guardian home or have their own residence. This would put an estimate of international students at about 50% of students in rented accommodation.
SPH’s occupancy for its student accommodation typically ranges 90-100%, excluding certain assets in Plymouth. Assuming a prolonged outbreak affecting occupancies up to Dec 20 (1H AY2020/FY21F), we opine the international student segment would be the most affected, and could put occupancies down to about 75%.
Another factor which could extend the downside is that international students would probably utilise more studio rooms which command higher rental rates. A sensitivity of the reduction in student accomodation occupancy rates is as shown in the PDF report attached. Click view full report button below for details.

We lower our FY20-22 net profit forecasts by 1-5%, reversing the impact from the Canadian aged care assets. Given the uncertainty over the new AY, we have not factored in any impact on SPH’s student accommodation yet, but would expect a negative hit if COVID- 19 is prolonged.

Maintain BUY with a lower SOTP-based target price of S$2.04, mainly due to the sell-down at SPH REIT (SGX:SK6U) and Prime US REIT (SGX:OXMU). See attached PDF report for SOTP valuation details.
The unprecedented measures taken by students and universities are a concern although there is some comfort as there is some leeway of time before the new AY begins. Barring the virus, the asset class appears resilient on the continued steady growth in student applications.

Lucas Teng UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-03-26

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