SPH REIT - Maybank Kim Eng 2021-01-14: Slow Road To Recovery

SPH REIT (SGX:SK6U)

SPH REIT - Slow Road To Recovery

SPH REIT (SGX:SK6U)’s 1QFY21 (Sep 2020 to Nov 2020) distribution, down 13% y-o-y, jumped 122% q-o-q to S$0.012/unit, as a quarter of deferred distributions was returned, on the back of recovering fundamentals. The results were in-line with ours and the street’s estimates, and we maintain forecasts and DDM-based target price (COE: 7.8%, LTG: 1.5%).
We see a slow pick-up in tenant sales at Paragon as tourism spend remains depressed by tight border controls, and hence its operational weakness to persist beyond FY21, even as Singapore’s retail recovery gains traction.

SPH REIT's balance sheet remains sound, but we see low near-term deal catalysts, as tenant retention gets prioritised. We prefer Frasers Centrepoint Trust (SGX:J69U) (see report: Frasers Centrepoint Trust - Maybank Kim Eng 2020-11-03: Suburban Strength) for its more resilient suburban mall portfolio.

SPH REIT's portfolio occupancy rose slightly to 97.9% (from 97.7% at end-Aug 2020) with improvement at Paragon (from 97.8% to 98.0%) and stable occupancy at Clementi Mall (99.6%). While revenue at Paragon and Clement Mall fell ~13% and ~7% y-o-y, tenant sales were cushioned by stronger domestic spend, and recovered during the year-end festive period to -15% y-o-y and -11% y-o-y, ahead of footfall, at -34% y-o-y and -51% y-o-y respectively, which remained squeezed by border restrictions and work-from-home arrangements.
Rental reversions were negative according to management, but forward leasing activity has eased expiries in FY21 at Paragon down to 17% (from 22% at end-Aug 2020) and Clementi Mall to 16% (from 20%).

SPH REIT's Australian properties fared better y-o-y, as revenue was flat at Figtree Grove and Westfield Marion contributed S$12.8m. The latter saw an 18% y-o-y decline in tenant sales, with lockdown restrictions in Adelaide in Nov 2020. Figtree Grove’s suburban residential catchment should support its fundamentals, while Westfield Marion remains a strong destination asset, with visibility from 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. Australia has reported low COVID-19 cases year-to-date and we expect tenant sales to improve in the coming months.

We expect that refinancing of SPH REIT's S$215m borrowing due in Jul 2021 could result in ~S$2m cost savings, while its leverage, maintained at ~30%, suggests a S$400-800m debt headroom (at 40-50% limit).
See SPH REIT Share Price; SPH REIT Target Price; SPH REIT Analyst Reports; SPH REIT Dividend History; SPH REIT Announcements; SPH REIT Latest News.
Management believes its operations have stabilised and expect to restart its acquisition growth efforts (in Australia).

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-01-14

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.800 SAME 0.800