Simons Trading Research

Author: simonsg   |   Latest post: Thu, 19 Sep 2019, 8:20 PM


SPH REIT - Improving Prospects But Lacks Major Catalyst

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  • SPH REIT's 1HFY8/19 results were in line, with DPU forming 48% of our FY19 forecast.
  • Improvement in rental reversion as well as contribution from the Rail Mall and Figtree are expected to be the main growth drivers in FY19-20.
  • Maintain HOLD with a higher DDM-based Target Price of S$1.08.

1HFY19 Results Boosted by Acquisitions

  • SPH REIT (SGX:SK6U) posted a set of in-line 1HFY19 results. Revenue improved 4.5% y-o-y to S$111.9m, mainly due to contribution from The Rail Mall and Figtree Grove Shopping Centre (FGSC) which was completed in Jun 2018 and Dec 2018, respectively. Accordingly, net property income increased 3.8% y-o-y.
  • SPH REIT's 1HFY19 DPU was 2.75 Scts versus 2.74 Scts last year, making up 48% of our full-year forecast. We expect income in 2HFY19 to be higher due to the contribution from FGSC.
  • SPH REIT's balance sheet remains robust with gearing of 30.1% and stable funding cost of 2.88%.

Positive Rental Reversion Seen Across All Assets

  • All assets reported positive rental reversions.
    • Paragon chalked an 8.6% rental reversion on the renewal of 15.2% of total NLA in 1HFY19.
    • Clementi Mall reported +5% rental reversion while
    • The Rail Mall registered +6.2% rental reversion on 14% of total NLA.
    This translated into strong portfolio rental reversion of +8.4%.
  • Overall tenant sales continued to register growth, while its portfolio was close to full occupancy at 99.2%.

Large Amount of Expiries in Clementi Mall in FY20

  • In FY19, SPH REIT has 2.3% of NLA due for renewal in Paragon, 1.5% in Clementi Mall and 37% in The Rail Mall. With improved retail sales sentiment and lower supply of retail space, we anticipate rental reversions to continue to improve in FY19.
  • The high renewal rate of 71.5% at Clementi in FY20 will give SPH REIT an opportunity to reconfigure and possibly improve rental rates.

Getting Ready for the High Renewals at Clementi Mall

  • To prepare for the renewals in FY20, SPH REIT has started to engage tenants in Clementi Mall. Given the strong footfall in the mall and high tenant retention rate track record, the REIT is confident that renewals would yield favourable results. Expiries include anchor tenants like BHG and NTUC.
  • On the acquisition front, SPH REIT is keen to acquire Seletar Mall should its sponsor decide to sell. The focus is still on Singapore.

Maintain HOLD

  • We raise our DDM-based Target Price to S$1.08 as we reduce our risk-free rate and terminal growth assumptions due to the changing interest rate sentiment. We also roll forward our valuation to FY20. There are slight changes to our FY19-21 DPU forecasts due to housekeeping exercise.
  • We like the niche position of its malls but it lacks major rerating catalysts.
  • Upside risk: Large accretive acquisitions.
  • Downside risk: Slower-than-expected rental reversion.

Source: CGS-CIMB Research - 08 Apr 2019

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