Analysts at DBS Group Research, OCBC Investment Research and CGS-CIMB Research have maintained their “hold” on SPH REIT following its FY2022 earnings result announcement.
DBS Group Research analysts Geraldine Wong and Derek Tan have kept their target price at 96 cents on the back of strong reopening play. In their note, the analysts point out that the tenant sales at Paragon — SPH REIT’s key asset — continue to recover on the back of higher domestic spending and influx of tourists since borders reopened in April.
“We estimate that tenant sales have now reached about 89% of 2019 levels on a full-year basis, with good reasons to expect a festive boost to operating metrics in 1QFY2023 (quarter ending December 2022) alongside the strong monthly traction of tourist arrivals.
“Indonesian and Chinese spenders are the two titans when it comes to tourist spending at Paragon, making up about 16% of mall footfall respectively. We expect developments on China’s border reopening to be a key catalyst for the stock,” they add.
Meanwhile, OCBC analyst Chu Peng — who has reduced her fair value estimate to 90 cents from 93 cents — highlights that all three of SPH REIT’s assets (Paragon, Clementi Mall, The Rail Mall) registered improvement in rental reversions.
“As tenants’ sales recover, management expects stronger leasing sentiment, potentially supporting improvement in rental reversions in FY2023. We note that The Clementi Mall and The Rail Mall have 47.3% and 46.2% of leases due for expiry by gross rental income in FY2023,” adds Chu.
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Paragon is expected to anchor SPH REIT’s status as a reopening play, given its 65% exposure by asset valuation to Orchard retail. The outperforming trade sectors continue to be the usual suspects, which are watches and jewellery, the DBS analysts add.
For SPH REIT’s Australia portfolio, tenants’ sales rose 4.2% y-o-y in FY2022 with sales at Westfield Marion and Figtree Grove normalising to pre-Covid levels in 4QFY2022. Rental reversions for Westfield Marion and Figtree Grove improved to -3.7% and -4.7% for FY2022. “As sales normalise, we could see rental reversions for Australia assets to stabilise,” says Chu.
SPH REIT stands as one of the lowest geared within the S-REITs sector, with aggregate leverage of 30% as at Aug 31. With about 70% of borrowings on fixed interest rate, a 10 basis points increase in interest rate (assuming 100% floating debt) will translate to a 0.5% impact on the REIT's distribution per unit (DPU), the DBS analysts highlight.
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“We think that SPH REIT stands resilient in comparison to peers given the hawkish environment. There is acquisition potential, although likely to be more selective given the higher cost of funding, and should lead to further upside to our DPU estimates.”
Meanwhile, CGS-CIMB's Lock Mun Yee and Natalie Ong have upped their target price to 96 cents from 95 cents previously on the back of improved tenant sales across the REIT's assets.
While portfolio reversions stood at a negative 2.8% for the FY2022, this was an improvement compared to the REIT's negative reversion of 8.4% in the FY2021, the CGS-CIMB analysts point out.
"Going forward, we think the portfolio could start showing positive reversions. August's valuation for the Singapore and Australia portfolio improved $42.5 million [which is up by 1.3% y-o-y] and A$6.5 million ($5.9 million) [which is up by 0.8% y-o-y], driven by higher rental income while cap rates remain stable," they write.
In their report, the analysts have upped their DPU estimates by 33.7% for the FY2022 and by 0.2% for FY2023's DPU, while lowering their FY2024 DPU estimates by 0.1%. This is mainly due to the change in the financial year-end and higher rental growth assumptions, they write.
"SPH REIT could potentially improve asset efficiency under the direction of its new property-led sponsor, Cuscaden Peak. SPH REIT is trading at an annualised 5.9% FY2022 DPU yield, at +0.6 standard deviations (s.d.) of historical average," they add.
As at 9.35am, units in SPH REIT are trading 0.5 cents lower or 0.56% down at 89 cents.
