SPH REIT - Maybank Kim Eng 2020-10-07: Slowly, Less Surely

SPH REIT (SGX:SK6U)

SPH REIT - Slowly, Less Surely

SPH REIT (SGX:SK6U)’s 2H20 DPU, down 63.5% y-o-y, was a miss on both ours and the street’s estimates, as it deferred SGD14.5m in distributions and provided SGD8.1m in rent relief to its Australian tenants.
We see a slow pick-up in tenant sales at Paragon in FY21 as tourism spend remains depressed by tight border controls while Singapore’s retail recovery gains traction.
We cut SPH REIT's FY21-22 DPU by 2-4% to factor in additional tenant support measures. Our DDM-based Target Price stays at SGD0.80 (COE: 7.8%, LTG: 1.5%).

SPH REIT's balance sheet remains sound, although we see low near-term deal catalysts, as tenant retention gets prioritised. Maintain HOLD.
We prefer Frasers Centrepoint Trust (SGX:J69U) (BUY, Target Price SGD2.80, see report: Frasers Centrepoint Trust - Maybank Kim Eng 2020-09-04: Gaining Scale) for its more resilient suburban mall portfolio.

SPH REIT's portfolio occupancy fell q-o-q from 98.8% to 97.7% as at end-Aug 2020, largely due to lower occupancies at Paragon, which dipped from 99.3% to 97.8%.
Shopper traffic and tenant sales at the mall fell 27.4% y-o-y and 28.2% y-o-y in FY20 with the absence of international tourists since Mar 2020.
Paragon achieved a +7.0% rental reversion versus +5.9% for 1H20 with leases renewed or signed pre-pandemic, but should deteriorate amid weak demand in FY21.
Clementi Mall’s occupancy was stable 99.6%, with its tenant sales at -12.7% y-o-y, against -27.8% y-o-y in shopper traffic.
The 3.5% y-o-y decline in its Singapore portfolio reflects the weaker rental contribution, as retail cap rates were kept at 4.50%.

SPH REIT's Australian properties fared better, with tenant sales at Westfield Marion and Figtree Grove down 9.1% y-o-y and 1.1% y-o-y respectively. The latter, backed by a suburban residential catchment, maintained its shopper traffic at 4.6m in FY20.
While footfall at the Westfield Marion fell 11.1% y-o-y given a higher discretionary offering, it remains a strong destination asset, with visibility supported by favourable lease structures – the majority of specialty tenant leases are embedded with yearly rental escalations at CPI plus an additional 2.0-2.5% spread.
We expect tenant sales across SPH REIT’s assets to gather pace in the coming months.

SPH REIT's leverage rose to 30.5% from 29.3% as at end-Feb 2020 with the completion of its Adelaide deal, implying SGD1.1-1.6b in debt headroom (at 45-50% limit).
The Woodleigh Mall, currently under construction, has been added to its sponsor’s ROFR pipeline. We believe that deal opportunities are unlikely to arise in the near term, as management focuses on tenant retention across its properties.
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/ 2020-10-07

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.800 SAME 0.800