CGS-CIMB Research analysts Eing Kar Mei and Lock Mun Yee have downgraded SPH REIT to “hold” from “add” previously as they deem the market to have already priced in the REIT's recovery at its current unit price.
Eing and Lock have kept their target price on SPH REIT at 95 cents.
“The REIT has one of the lowest gearing levels (30.1% in 2QFY2022 ended February) among Singapore REITs (S-REITs) which gives it ample firepower for acquisitions,” they write in their report on April 1.
“However, it is trading at [a] 5.4% distribution per unit (DPU) yield, near its 5-year average of 5.3%. This is also lower than retail REITs’ average yield of 5.6%,” they add.
The analysts’ report comes after the REIT reported stronger numbers for the 1HFY2022, which came in line with their full-year forecast.
For the period, SPH REIT reported a distribution per unit (DPU) of 2.68 cents, up 9.8% y-o-y.
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The REIT’s DPU for the 1QFY2022 and 2QFY2022 came in at 1.24 cents and 1.44 cents respectively.
As at end-February, the REIT’s portfolio occupancy rate remained high at 98.4%.
Tenant sales during the 1HFY2022 increased 1% y-o-y.
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On this, Eing and Lock say they see tenant sales to improve going forward, due to the relaxed restriction measures and as consumers adapt to living with Covid-19 as an endemic.
In addition, the analysts are expecting rental pressures to ease this year due to fewer Covid-19 restrictions compared to that in 2021. The REIT’s Paragon Mall in Orchard Road is also a prime beneficiary of easing border measures.
To them, any accretive acquisitions are upside risks to the REIT, while weaker-than-expected rental reversions, as well as a worse-than-expected impact from higher operating expenses are downside risks to the counter.
The team at DBS Group Research has kept “hold” on SPH REIT with a target price of 96.4 cents that’s tagged to the cash offer made by Cuscaden Peak.
In an update dated April 4, the team also noted that the REIT’s topline and DPU stood in line with their full-year estimates.
That said, the REIT seems to be seeing the first sign of higher utility costs as its operational metrics stood at an inflexion point.
Its Singapore portfolio reported higher operating expenses with a 30% increase in utilities, as opposed to 1.5% of gross rental income (GRI).
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“Local utility rates are generally floating in nature, while other expenses such as cleaning & maintenance continue to be largely fixed in nature,” writes the team. “On the other hand, higher utility costs in Australia are largely sheltered on fixed terms.”
Like the analysts at CGS-CIMB, the DBS team also sees favourable catalysts for Paragon Mall as borders reopen.
“Paragon Mall saw some uptick in medical tourist, with borders reopened with Indonesia, a key market for medical tourists. Amongst trade sectors, watches & jewellery was amongst the best performers, while luxury products continue to feel the heat from the lack of tourists,” writes the team.
“The reopening of atrium sales, alongside reopening of borders, will be key catalysts for Paragon in the coming quarters as a key luxury mall along Orchard Road,” they add.
Maybank Securities analyst Chua Su Tye has also kept his "hold" call on SPH REIT with an unchanged target price of 95 cents.
While he notes that the REIT's metrics for the 1HFY2022 are "healthy" and in line with his full-year estimates, acquisition visibility remains low.
"Clementi Mall’s resilience however reinforces our preference for suburban retail. As a result, we prefer Frasers Centrepoint Trust (FCT) for its concentrated suburban mall portfolio," he adds.
Chua has given FCT a "buy" call with a target price of $2.90.
That said, the analyst expects Seletar Mall to be a priority acquisition target. The mall is currently owned by the REIT's sponsor, SPH. In this case, a fully debt-funded acquisition would lift his DPU target for the FY2022 by around 8%, says Chua.
"However, with [the] restructuring of its sponsor likely to be a priority, inorganic growth is likely to take a back-seat," he adds.
To this end, Chua sees SPH REIT trading sideways in the near term as it is bound by a chain offer from SPH's ongoing privatisation exercise.
As at 10.15am, units in SPH REIT are trading flat at 97 cents, or an FY2022 P/B of 1.07x and dividend yield of 5.44%, according to CGS-CIMB’s estimates.
