SPH REIT - Maybank Kim Eng 2020-04-02: Challenges Ahead

SPH REIT (SGX:SK6U)

SPH REIT - Challenges Ahead

SPH REIT (SGX:SK6U)’s 2Q20 DPU fell by 78.7% y-o-y and 78.3% q-o-q to SGD0.30cts, as management envisions a more challenging outlook for its retail properties for the remaining FY due to Covid-19, and it has retained distributions as a result.
We lowered DPUs by 15-18%, and our DDM-based Target Price falls to SGD0.80 (COE: 7.4%, LTG: 1.5%).

SPH REIT's balance sheet remains sound at 29.3% leverage, although we see low near-term deal catalysts, as tenant retention gets prioritised. Downgrade to HOLD.
We prefer CapitaLand Mall Trust (SGX:C38U) (BUY, Target Price SGD2.70) for its scale, and stronger acquisition and potential development growth pipelines.

SPH REIT's revenue rose 26.1% y-o-y and 21.8% q-o-q while NPI jumped 23.3% y-o-y and 20.4% q-o-q with the maiden contribution of Westfield Marion from 6 Dec 2019 and broad-based improvement across its Singapore properties. See SPH REIT Announcements.
Portfolio occupancy dipped slightly from 99.3% to 98.9% - its Singapore properties saw near-full occupancies except for Rail Mall, and this rose from 89.5% to 92.2%.
Portfolio rental reversion at +6.7% was strong across all three Singapore assets, led by Rail Mall at +14.5%, with Clementi Mall at +8.2% and Paragon at +5.6%.

Management shared that its retail and F&B businesses were adversely impacted by the stricter social distancing measures introduced at end- Mar 2020 to control the spread of Covid-19. Meanwhile, its supermarket, pharmacy and take-away food tenancies are holding up well.
SPH REIT will fully pass on the government’s property tax rebates and it granted SGD4.6m in rental rebates for two months (for Feb-Mar) for affected tenants. It further expects to grant up to 50% of base rent in rental rebates for its most affected tenants, the majority of which are in discretionary trade sectors.
We see further erosion in shopper traffic and tenant sales in 3Q20 due to the tight restrictions on inbound tourists.

SPH REIT's leverage rose to 29.3% with the completion of its Adelaide deal, which was supported by a SGD164.5m equity fund raising in Dec 2019. Its balance sheet is strong and we estimate SGD1.1b in debt headroom (at 45% limit) to support further deals, although we believe these are unlikely in the near term, as management focuses on tenant retention.
See SPH REIT Share Price; SPH REIT Target Price; SPH REIT Analyst Reports; SPH REIT Dividend History; SPH REIT Announcements; SPH REIT Latest News.

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-04-02

SGX Stock Analyst Report HOLD DOWNGRADE BUY 0.80 DOWN 1.150