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


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's 2H20 financials show improvement

  • 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.

Operational metrics stabilise with key overhang removed

  • 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.

Merger plans paused but ESR open to future combination

  • 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 likely to see better year ahead

  • 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.

Maintain BUY with higher target price of S$0.45.

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