SINGAPORE (Jan 8): CIMB is reiterating its “hold” call on SPH REIT with an unchanged target price of $1.06, after the trust’s 1Q18 distribution per unit (DPU) came in within expectations at 23.8% of the research house’s forecast with a total return of about 4%.
Lead analyst Lock Mun Yee says she continues to like SPH REIT’s Paragon and Clementi Mall properties for their niche positioning within micro-markets in spite of the near-term challenging environment.
While the trust’s latest performance was largely affected by negative rental reversions from Paragon, Lock highlights that the bulk of expiring let lettable area (NLA) for the rest of FY18 and FY19 will largely come from the mall. This could in turn help SPH REIT to benefit from improved retail sentiment on the back of a recent pickup in retail sales and a better economic outlook, she adds.
The analyst also notes how SPH REIT enjoys a healthy balance sheet as at end-1Q with a gearing of 25.4%, leaving the trust significant debt headroom which puts it in a strong position to evaluate inorganic growth opportunities.
“Based on a gearing of 35-40%, we estimate that the trust has a debt headroom of c.$490-800 million,” states Lock.
New and accretive acquisitions would hence serve as a key re-rating catalyst for the REIT, according to the analyst, although risks include a protracted downturn in the retail sector which could result in an extended period of negative rental growth.
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CIMB has projected for FY18-19F net property income (NPI) of $168.6 million and $172.5 million, respectively.
Separately, OCBC has downgraded its call on the REIT to “hold” from “buy” previously with a fair value estimate of $1.08.
In a report on Monday, lead analyst Andy Wong notes that while SPH REIT’s unit price has performed well to generate total returns of 19.1% since the start of 2017, it is now close to the research house’s fair value estimate and hence warrants a downgrade based on valuation grounds.
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Wong nonetheless notes that recent trends of improving consumer & tourism sentiment would bode well for SPH REIT – and remains cognisant that a potential re-rating catalyst would come from the trust’s proposed acquisition of Seletar Mall from its sponsor on accretive terms, which has yet to be been factored into OCBC’s valuation model.
“Both Paragon and Clementi Mall continued to maintain their 100% committed occupancy, but we believe this came at the expense of rentals. Paragon registered a negative rental reversion of 10.6%, while TCM saw a rental downtick of 9.8%, which management attributed to a change in trade mix for a replacement tenant,” comments Wong on SPH REIT’s latest 1Q18 results.
“Overall portfolio rental reversion was -10.6%. The silver lining was the fact that the negative rental reversions only applied to 4.4% (15 leases) and 1.1% (one lease) of Paragon’s and TCM’s NLA, respectively, or 3.7% of its total portfolio’s NLA,” he adds.
As at 10.31am, units of SPH REIT are trading flat at $1.07, representing a FY18F dividend yield of 5.25% and 5.6% based on CIMB and OCBC’s projections, respectively.
