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

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

SPH REIT - Slowly, Less Surely

SPH REIT's 2H20 a miss, maintain HOLD

  • 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.

Weaker contributions in Singapore

  • 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%.

Encouraging recovery in Australia

  • 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.

Sound balance sheet lacking deal catalysts

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