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Has the market priced in SPH REIT's full acquisition potential?

Michelle Zhu
Michelle Zhu • 3 min read
Has the market priced in SPH REIT's full acquisition potential?
SINGAPORE (Apr 9): CIMB, Maybank Kim Eng and OCBC are reiterating their “hold” calls on SPH REIT with unchanged target prices and a lower fair value of $1.06, $1 and $1.02, respectively.
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SINGAPORE (Apr 9): CIMB, Maybank Kim Eng and OCBC are reiterating their “hold” calls on SPH REIT with unchanged target prices and a lower fair value of $1.06, $1 and $1.02, respectively.

This follows the announcement of the REIT’s 2Q18 results last Friday, which came in line with all three research houses’ forecasts.


See: SPH REIT 2Q DPU comes in flat at 1.4 cents

In a report last Friday, CIMB lead analyst Lock Mun Yee says she anticipates an improvement of renewal rents from the –7.1% reported for 1H18, given an estimated 30% of net lettable area (NLA) due for renewal in 2H18-19.

Highlighting the trust as the lowest geared Singapore REIT (S-REIT) at 25.4% as at end 2Q, she believes SPH REIT has significant debt headroom for new and accretive acquisitions ahead, which would also serve as potential unit price catalysts.

Lock also continues to like Paragon and The Clementi Mall for their niche positioning in their micro-markets.

See also: Analysts show concern on Food Empire's margins in FY2024 and beyond

On the contrary, Maybank analyst Chua Su Tye says that while SPH REIT remains a strong proxy to growth in tourist arrivals and a recovery in prime Orchard Road rents, he believes its fairly valued unit price signals that the market has priced in the REIT’s potential acquisitions.

Chua expects its flagship Paragon mall to see catalysts from stronger shopping traffic and tenant sales, and estimates that the potential acquisition of a 100% stake in The Seletar Mall would add 10-12% to the REIT’s FY18 DPU assuming that the purchase is fully funded by debt.

While CIMB and Maybank are keeping their forecasts for FY18-20 intact, OCBC has raised its cost of equity (COE) assumption slightly to 7% from 6.7% in light of the recent increase in market volatility.

See also: Brokers’ Digest: ComfortDelGro, Frasers Property, Bumitama Agri, Paragon REIT, Cromwell European REIT, Memiontec, CSE

Nonetheless, OCBC lead analyst Andy Wong notes an improved operational outlook for SPH REIT given Paragon's uptick in luxury sales, and its ongoing AEI to create a new concept at level 3 to be opened in phases from Jun to Nov this year.

He also continues to like the REIT for its healthy financial position and sufficient debt headroom for further acquisitions.

"As for Seletar Mall, we believe the intention to acquire is firm, but any transaction would also have to depend on the owners of the mall, SPH (70% stake) and United Engineers (30%)," says Wong.

DBS has, on the other hand, upgraded its call on SPH REIT to “buy” from “hold” previously with an unchanged target price of $1.07.

The move comes on the basis of better risk-reward ratios following its recent unit price correction of more than 7% despite growing confidence that the operating outlook has improved with acquisition upside.

In a Monday report, lead analyst Derek Tan says he sees ample opportunities for SPH REIT to deliver an earnings surprise considering the REIT’s under-geared balance sheet and a stable yield of 5.5%.

As opposed to Maybank’s Chua, Tan thinks the market does not appear to have factored in the estimates for the acquisition of The Seletar Mall, which he believes will contribute to the REIT’s earnings from FY19 onwards.

“With the manager indicating that they remain keen to pursue inorganic growth opportunities in Singapore and Australia, the REIT’s low cost of capital and ample debt capacity enable the REIT to deliver earnings accretion when such deals are executed,” says Tan.

As at 11.37am, units in SPH REIT are trading 0.5% lower at $1, which implies a 5.8% distribution yield based on DBS’s FY19 forward estimates.

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