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Analysts mixed on SPH REIT amid 1Q results

Felicia Tan
Felicia Tan1/18/2021 05:33 PM GMT+08  • 4 min read
Analysts mixed on SPH REIT amid 1Q results
CGS-CIMB has given SPH REIT "add", while OCBC Investment Research and Maybank Kim Eng have recommended "hold" on the counter.
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As SPH REIT announced distribution per unit (DPU) of 1.20 cents for the 1QFY2021 ended November on Jan 14, analysts from CGS-CIMB Research, Maybank Kim Eng and OCBC Investment Research are mixed on the REIT’s recovery prospects.

See: SPH REIT posts 13% lower DPU of 1.20 cents for 1QFY2021

CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee have maintained their “add” call on SPH REIT albeit with a slightly lower target price of $1.06 from $1.07 previously, as they expect “gradual improvement” to follow.

Revenue for SPH REIT in 1QFY2021 grew by 10.8% y-o-y to $66.6 million, coming in at 24% of their full-year forecast.

The higher revenue was due to the better performance from the REIT’s Australian portfolio compared to their malls in Singapore, which was attributable to the rental reliefs granted to tenants.

Eing and Lock also note that SPH REIT’s occupancy rate during the quarter remained stable q-o-q at 97% to 100%, and that tenant sales saw “good recovery”, though rental pressure remains.

“Considering the strong tenant sales recovery, barring a resurgence of Covid-19, we believe lease renewals would be less of a concern although rental reversions would be under pressure,” they write in a Jan 14 report.

Despite the positive outlook, Eing and Lock have reduced their DPU estimates for FY2021 to FY2023 by 3% to +0.4% as they update their model based on annual figures. Their dividend discount model-based (DDM-based) target price is reduced accordingly.

“Barring the resurgence of Covid-19, we expect the malls to experience gradual recovery in footfall from current levels. It is trading below book at 0.86 times price-to-book (P/BV) (-1 standard deviation below mean) and over 6% yield,” they say.

On the other hand, analysts from Maybank Kim Eng and OCBC Investment Research (OIR) have given or maintained their “hold” calls on the REIT as they foresee recovery to be slow.

Maybank Kim Eng’s Chua Su Tye says the REIT’s 1QFY2021 results were in line with the brokerage’s and the street’s estimates.

As such, he has maintained his forecasts, as well as target price of 80 cents on the REIT.

While SPH REIT’s Singapore portfolio occupancy rose slightly for Paragon and Clementi Mall, Chua notes that there’s been a “slow pick-up” in tenant sales at Paragon due to lower tourism spend amid tight border controls.

As such, he foresees Paragon’s operational weakness to “persist beyond FY2021” even as Singapore’s retail recovery gains traction.

“Its balance sheet remains sound, but we see low near-term deal catalysts, as tenant retention gets prioritised,” he says.

Compared to SPH REIT, Chua says he prefers Frasers Centrepoint Trust (FCT) for its “more resilient suburban mall portfolio”. Chua has rated “buy” on FCT with a target price of $2.90.

To Chua, the REIT’s Australian portfolio is expected to fare better compared to its Singapore counterpart.

SPH REIT’s Australian properties outperformed its Singapore portfolio y-o-y.

The way he sees it, Figtree Grove’s suburban residential catchment should support its fundamentals, while Westfield Marion remains a strong destination asset, with visibility from favourable lease structures.

“The majority of specialty tenant leases are embedded with yearly rental escalations at CPI plus an additional 2.0-2.5% spread. Australia has reported low Covid cases y-t-d and we expect tenant sales to improve in the coming months,” he says.

Chua also views SPH REIT’s balance sheet to be “sound” but lacking in deal catalysts.

“We expect that refinancing of its $215 million borrowing due in July could result in around $2 million cost savings, while its leverage, maintained at 30%, suggests a $400 million to $800 million debt headroom (at 40-50% limit),” he adds. “Management believes its operations have stabilised and expect to restart its acquisition growth efforts (in Australia).”

Despite her “hold” call, OCBC analyst Chu Peng has upped her fair value estimate on SPH REIT to 88 cents from 82 cents previously.

This is due to SPH REIT’s healthy portfolio occupancy rate as at Dec 31, 2020, even though management highlighted negative rental reversions in 1QFY2021.

“We expect rental reversions to remain under pressure in FY2021 as business sentiment remains weak and tenant retention is prioritised. Given positive developments on vaccines, we decrease our cost of equity (COE) from 7.8% to 7.4%,” she says.

Units in SPH REIT closed 0.5 cent higher or 0.6% up at 87.5 cents on Jan 18.

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