Singapore Press Holdings (SPH) - UOB Kay Hian 2020-04-02: Unexpected Drastic Dividend Cut By SPH REIT, Downgrade To HOLD

SINGAPORE PRESS HLDGS LTD (SGX:T39)

Singapore Press Holdings (SPH) - Unexpected Drastic Dividend Cut By SPH REIT, Downgrade To HOLD

SPH REIT (SGX:SK6U) announced a DPU of 0.3 S cents, a massive cut of 79% y-o-y in light of the challenging nature of retail malls posed by the COVID-19 outbreak.
Separately, SPH (SGX:T39) also announced that its student accommodation expects a loss of £4m-8m from refunds made to students.

The unprecedented, accelerated nature of the COVID-19 outbreak is uncovering risks for SPH’s recurring income.
Downgrade to HOLD with target price cut by 22% to S$1.61. Entry price: S$1.40.

DPU for SPH REIT for 2QFY20 was at 0.30 S cents, a decline of 79% y-o-y. See SPH REIT Announcements.
While operations were mainly stable for the quarter, the distribution is modest in light of the challenging circumstances arising from the COVID-19 situation in the months ahead. Net property income for 2QFY20 was up 23% y-o-y to S$10.6m mainly due to contributions from the acquisition of Westfield Marion Shopping Centre while Paragon, The Clementi Mall and The Rail Mall registered positive rental reversions for the quarter.
The huge dividend cut comes as a surprise and points at the potential hit to the retail sector from the COVID-19 outbreak in the coming quarters.
SPH (SGX:T39) owns approximately 65% of SPH REIT.

On top of the government’s property tax rebates, SPH REIT has provided further assistance to help tenants. In Feb and Mar 20, tenant rebates amounting to approximately S$4.6m have been granted to those affected tenants. This is part of the Tenants’ Assistance Scheme rolled out to provide tenants with rent relief, which will be extended into the months of Apr and May 20.
The most affected tenants will be granted rental rebates of up to 50% of base rent. For tenants who are required by the government to cease operations, such as enrichment centres, SPH REIT will grant full waiver of rental for the period of closure. Its Australian malls will also evaluate the need for a support package.

Separately, SPH also announced it is also offering students the option to leave their tenancies early for Academic Year (AY) 2019/20. This means that students who choose to return home will not have to pay rent while refunds will be made to students who have already paid up to the end of the term in May/Jun 20. See also our previous report: Singapore Press Holdings (SPH) - UOB Kay Hian 2020-03-26: COVID-19 Impact On UK Accommodation Assets.
The group expects a loss of revenue of £4m-8m (S$7m-14m) till the end of FY20, given the current level of occupancy. While not unexpected, the higher end of the expected losses forms a sizeable 15-20% of our estimated contribution from student accommodation for FY20.

SPH's interim dividend for FY19 was 5.5 S cents while full year dividend was 12 S cents. See SPH Dividend History. The huge cut in dividends for SPH REIT would put SPH’s dividends in jeopardy, in our view.
Our new estimate for FY20 dividend stands at 8 S cents, a 34% cut from FY19, assuming a 100% payout ratio (FY19: 120%). There are downsides to the assumption, if a lower payout ratio is utilised.

We lower our FY20-21 net profit forecasts by 16-19%, due to the rent rebates given by SPH REIT as well as the impact from student accommodation. We now assume a recovery for all business units of SPH only in 4Q19. Our FY22 earnings are unchanged.

Downgrade HOLD with a lower SOTP-based target price of S$1.61 (previously S$2.04). We have taken an approximately 30% haircut to the current price of SPH REIT, assuming a negative price reaction from the huge dividend cut. See attached PDF report for SOTP details.
In the longer term, SPH’s recurring income may prove be valuable. Unfortunately, the unprecedented nature of the COVID-19 pandemic appears to have thrown a spanner into its works.
See SPH Share Price; SPH Target Price; SPH Analyst Reports; SPH Dividend History; SPH Announcements; SPH Latest News.
Entry price is S$1.40.

Lucas Teng UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-02

SGX Stock Analyst Report BUY MAINTAIN BUY 1.61 DOWN 2.040