Sabana Shari'ah Compliant REIT - DBS Research 2021-01-25: Turning A New Page

SABANA SHARI'AH COMPLIANT REIT (SGX:M1GU)

Sabana Shari'ah Compliant REIT - Turning A New Page

Sabana REIT's FY20 portfolio occupancy improved to 76.5%; rental reversion at +0.9%.
Completion of New Tech Park+ could boost FY22F topline by ~4.4%.
Merger with ESR-REIT is possible at improved valuation.
Maintain BUY on Sabana REIT with higher target price of S$0.45.

Sabana REIT (SGX:M1GU)'s 2H20 revenue and net property income (NPI) improved h-o-h to S$37.4m (+9.3% h-o-h, -5.5% y-o-y) and S$23.8m (+14.0% h-o-h, -11.7% y-o-y) respectively as the REIT recovered from the COVID-19 lockdown in 1H20.
However, revenue and NPI was still poorer compared to FY19 due to lower contribution from 10 Changi South Street 2 as a result of the termination of a master lease in 2H19 and higher allowances for impairment losses on receivables.
In line with revenue and NPI, Sabana REIT's 2H20 DPU rose to 2.29 cents (includes 0.58 cents withheld in 1H20) from 0.47 cents in 1H20.
Gearing inched down by 0.2 ppt to 33.5% as at end- 2H20 while financing costs dipped 3.1% due to the low interest rate environment.

Sabana REIT's FY20 portfolio occupancy rose to 76.5% from 75.4% in the previous year while rental reversion was at +0.9% compared to -0.7% in FY19.
Portfolio WALE as at end-2H20 was 3.1 years increasing from 2.7 years as at 1H20.
A key overhang of Sabana REIT in the form of large lease expiries was addressed in FY20. Back in FY19, 42.4% of leases by NLA were due to expire in FY20. The situation did not improve substantially as at end-1H20 with 26.4% of leases by gross rental income due to expire in FY20. However, the situation has improved with occupancies rising in FY20 and FY21F lease expiries now standing at 21.6% of gross rental income as at end-FY20.
Overall, Sabana REIT performed respectably in FY20 considering the COVID-19 outbreak and large lease expiries it faced.

Sabana REIT’s shareholders voted against the merger with ESR-REIT (SGX:J91U) in 2H20 as the offer price was deemed inadequate.
Going forward, Sabana REIT will continue its “Refreshed Strategy” of divesting non-performing assets and undertaking asset enhancement initiatives (AEI) for selected properties.
ESR-REIT has stated that it remains open to a future merger although regulations do not allow another offer to be made within a 12-month window.

Sabana REIT should see a recovery in FY21 helped by rental contributions from the completion of the AEI at 151 Lorong Chuan (NTP) and a lower base that was impacted by higher allowances for receivables impairment.
New Tech Park+ completion could contribute additional ~S$3.5m to topline and enhance the property’s occupancy.
We also do not foresee Sabana REIT making any significant acquisitions during the year with the Sponsor likely to prioritise ESR-REIT for any injections.
An improved merger offer from ESR-REIT may also be on the cards with ESR-REIT’s CEO discussing the possibility and e-Shang Infinity Cayman continuing to hold a sizable stake in Sabana REIT.

See Sabana REIT Share Price; Sabana REIT Target Price; Sabana REIT Analyst Reports; Sabana REIT Dividend History; Sabana REIT Announcements; Sabana REIT Latest News.
Despite facing large lease expiries in FY20 and the COVID-19 outbreak, Sabana REIT’s portfolio occupancy improved. However, NPI was slightly lower than forecast on higher allowances for impairments on receivables. As the merger with ESR-REIT has fallen through, we raise our target price to S$0.45 as we return to a DCF-based valuation for Sabana REIT (vs the previous valuation which was pegged to 0.94x our target price for ESR-REIT).

Derek TAN DBS Group Research | Woon Bing Yong DBS Research | https://www.dbsvickers.com/ 2021-01-25

SGX Stock Analyst Report BUY MAINTAIN BUY 0.45 UP 0.400