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Paragon REIT 'one of the key beneficiaries' of Singapore's reopening; upgrade to 'buy': DBS

Felicia Tan
Felicia Tan1/26/2023 05:58 PM GMT+08  • 2 min read
Paragon REIT 'one of the key beneficiaries' of Singapore's reopening; upgrade to 'buy': DBS
Paragon mall comprises 65% of Paragon REIT's portfolio (by asset valuation). Photo: Samuel Isaac Chua/The Edge Singapore
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DBS Group Research analysts Geraldine Wong and Derek Tan have upgraded Paragon REIT (formerly SPH REIT) to “buy” from “hold” previously.

Wong and Tan have also raised their target price to $1.10 from 96 cents.

Singapore’s tourism sector looks set to get a lift from China’s border reopening. To this end, Paragon REIT will also stand as one of the key beneficiaries of the opening. The REIT has the largest exposure to Orchard retail, with Paragon mall anchoring 65% of its portfolio (by asset valuation), note the analysts.

“Indonesian and Chinese spenders are the two titans when it comes to tourist spending at Paragon, making up a collective 32% of mall footfall. We expect further developments on China’s border reopening to be a key catalyst for the stock,” they write.

As tenant sales in Paragon continue to recover on the back of higher domestic spending and the higher number of tourists since borders reopened in April 2022, Wong and Tan estimate that the mall’s tenant sales have reached around 89% of its 2019 levels on a full-year basis.

At its current unit price levels, the REIT is trading at an “attractive” P/BV of 1.0x and an FY2023 yield of 5.6%, below its historical mean, say the analysts.

See also: CGS-CIMB maintains 'add' call on Sembcorp Marine following news of probe in Brazil

In addition to their upgrade, the analysts see the possibility of a takeover for the REIT.

“With a new sponsor being Cuscaden Peak Pte Ltd, whose ultimate shareholders are sponsors of other listed REITs, we believe that a takeover could be a possible scenario to unlock value,” the analysts write.

“In our scenario analysis, our proforma estimates imply an accretion for unitholders up to a 1.2x P/BV for Paragon REIT,” they add.

See also: RHB downgrades Starhill Global REIT to 'neutral' on arbitration overhang

The analysts’ higher target price accounts for their valuations rolled forward into the FY2023 with a weighted average cost of capital (WACC) of 6.4%, from 6.8% previously. The lower WACC is to account for a lower risk premium on the back of benefitting from return of reopening and the Chinese tourists, the analysts add.

Units in Paragon REIT closed 0.5 cent higher or 0.51% up at 98 cents on Jan 26.

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