SINGAPORE (Oct 12): Analysts are generally keeping a positive stance on SPH REIT following its results announcement yesterday.
The REIT posted a DPU of 1.43 cents for 4Q18, a slight increase from 1.42 cents in 4Q17. This brings FY18 DPU to 5.54 cents, 0.2% higher compared to 5.53 cents in FY17.
Revenue was 0.2% higher y-o-y at $53.0 million, mainly due to higher rental income from The Clementi mall and two months contribution from newly acquired The Rail Mall. This was however offset by lower rental income at Paragon.
See: SPH REIT posts marginally higher 4Q DPU of 1.43 cents
Following the results announcement, DBS is maintaining its “buy” call on SPH REIT with a lower target price of $1.04, compared to $1.07 previously.
In a Friday report, analyst Carmen Tay and Derek Tan says, “We were previously too optimistic on the potential acquisition of The Seletar Mall. We believe that recent shareholding changes at United Engineers (which holds 30% stake in The Seletar Mall) might infuse uncertainty on the timing and ability of SPH REIT to acquire 100% stake in the mall.”
Hence, the analysts have stripped off contributions from the asset in their estimates for now.
Despite this, they still see ample organic growth opportunities for the REIT, on the back of improving rental reversionary prospects, especially for Paragon, as well as value-add opportunities for The Rail Mall.
The Rail mall will be delivering its first full-year contributions in FY19 and is expected to drive DPU growth ahead.
“Apart from increased confidence of an improved operating outlook, we also like SPH REIT for potential upside from acquisitions,” says Tay and Tan.
On the other hand, Maybank KimEng is reiterating its “hold” recommendation on SPH REIT with a target price of $1.00.
SPH REIT remains a strong proxy to growth in tourism spending and recovery in prime Orchard Road rents. Although revenue contribution from Paragon dropped by 2.1% y-o-y in FY18, shopper traffic and tenant sales both rose 2.7%.
Meanwhile, Paragon’s rental reversion of -3.7% had moderated from the weaker 1Q-3Q, causing occupancy cost to improve y-o-y from 19.6% to 18.3%.
In a Friday report, analyst Chua Su Tye says, “This should support an improving rental outlook, and we forecast rents to rise 3-5% in FY18-19 on the back of a cyclical recovery.”
The analysts believe that SPH REIT’s Rail Mall deal is a sound step to alleviate e-commerce risks, but unlikely to change its overall DPU growth profile, as near-term organic growth is likely to be capped by high 96% occupancy and low footfall.
Therefore, investors will require patience, given limited visibility on its long-discussed potential Seletar Mall deal, which remains the REIT’s key acquisition growth opportunity in Singapore. The management will also continue to eye third-party retail assets in Australia.
Similarly, CGS-CIMB Securities continues to rate CGS-CIMB a “hold” with a lower target price of $1.03 from $1.07 previously.
SPH REIT has 13.7% and 70.7% of NLA due for renewal in FY19 in Paragon and Clementi Mall, respectively.
In a Friday report, analyst Eing Kar Mei says, “With improved retail sales sentiment, we anticipate rental reversions to continue to improve in FY19. The high renewal rate at Clementi in FY19 also gives the REIT opportunity for reconfiguration”
In addition, Paragon will spot a new retail zone of about 16,000 sq ft at Level 3. It is targeted to be launched in November.
This retail concept may not immediately generate returns, but it will help to increase footfall, especially from younger customers.
As for the Rail Mall, the REIT has started marketing activities and analysing tenants’ sales performance. Many plans are underway to increase the attractiveness of the mall. Currently, the mall is dominated by F&B players and management intends to maintain its identity.
As at 11.40am, units in SPH REIT are trading at $1.00 or 1.05 times FY19 book with a dividend yield of 5.80%.
