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UOB Kay Hian calls SPH FY21 results 'a stark rebound', recommends investors accept Keppel's offer

Jovi Ho
Jovi Ho • 4 min read
UOB Kay Hian calls SPH FY21 results 'a stark rebound', recommends investors accept Keppel's offer
“We recommend shareholders to accept Keppel’s offer at $2.099/share given the fair valuation of SPH."
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SPH’s FY2021 results reveal a stark rebound, as the company is no longer weighed down by its media segment, write UOB Kay Hian Research analysts Llelleythan Tan and John Cheong.

SPH reported a strong set of FY2021 results operating profit up 70% y-o-y while PATMI was strong at $93 million, backed by strong contributions from the purpose-built student accommodation (PBSA) and retail & commercial segments. SPH declared a final dividend of 3 cents, resulting in a total of 6 cents dividend for FY2021, compared to 2.5 cents for the entire FY2020.

The transfer of the media segment is expected to be completed in December 2021 while the EGM for Keppel’s privatisation offer is set to be held in mid-November 2021. “We recommend shareholders to accept Keppel’s offer at $2.099/share given the fair valuation of SPH, in our view,” write Tan and Cheong in an Oct 7 note.

Buoyed by gradual market recovery, SPH’s FY2021 property profit before tax (PBT) grew to $206.9 million, compared to a loss before tax of $56.3 million in FY2020, largely contributed from the first full-year contributions from several assets and lower rental reliefs to tenants.

See: SPH reports swansong earnings of $92.9 million for FY2021

Contribution from SPH REIT increased to $149.7 million, up 23.3% y-o-y, backed by resilient sales from its portfolio.

See also: Analysts weigh in on Singtel after restructuring of Intouch Holdings

Overall portfolio tenant sales remained resilient and grew 2% y-o-y despite a 20% y-o-y decline in footfall caused by lockdown restrictions. Sales from suburban malls (Clementi Mall and Seletar Mall) are back to pre-Covid-19 levels due to them being located in strong catchment locations, write Tan and Cheong.

Although SPH REIT’s overall occupancy remains high at 98.8%, there was negative rental reversion of 8.4% due to soft retail leasing sentiment.

SPH REIT has a healthy portfolio weighted average lease expiry (WALE) of 5.4 years by net lettable area (NLA) and 2.7 years by Gross Rental Income (GRI). “We reckon that with higher vaccination rates in both Australia and Singapore, the retail segment will be able to rebound when Covid-19 restrictions are eased,” write Tan and Cheong.

See also: CGS International maintains ‘add’ call on Grab amidst slower ebitda growth in 2QFY2024

On student accommodation assets, target revenue for academic year (AY) 2021/2022 has already reached 96.5%, backed by the release of A-level results as students started booking their places for university.

All Student Castle properties have surpassed last year’s performance, with some properties attaining full 100% occupancy and raising room rent prices as students start returning for the new AY. Capital Students properties are also averaging impressive 98% occupancies.

SPH acquired two new properties in September 2021 at $123 million, which enlarges the portfolio to 8,366 beds (7,721 beds). “Looking forward, we reckon that high vaccination rates in developed countries as well as the reopening of international borders to students would provide strong demand for student accommodation,” says Tan and Cheong.

On SPH’s beleaguered media segment, Tan and Cheong think “it’s time to say goodbye”. “The media segment continued its slide downwards as print ad revenue dropped 14.7% y-o-y, marking the worst performance in the past four years.”

The media segment suffered a net loss of $128.3 million, comprising a loss of $115.3 million as the media business gets transferred.

Excluding Jobs Support Scheme (JSS) rebates, FY2021 media operating loss was $37.8 million. Shareholder approval was obtained in September for SPH’s media business to be transferred to a non-profit company limited by guarantee (CLG). The transition process has started and is expected to be completed in December 2021.

As a recap, Keppel Corporation (Keppel) announced a proposed privatisation offer for SPH through a scheme of arrangement whereby SPH will be delisted and become 100% owned by Keppel. The scheme is conditional on the completion of SPH’s media restructuring, for which approval has been obtained.

For more stories about where money flows, click here for Capital Section

An EGM has been scheduled for mid-November 2021 to seek shareholders’ approval for the privatisation. “A full privatisation avoids the situation where SPH’s assets are cherry picked, leaving SPH with its remaining debt and risk of monetising the remaining assets. Furthermore, a controlling stakeholder would allow SPH to focus on executing its business strategies, write Tan and Cheong.

“Keppel’s offer seems to have taken an overall fair valuation for SPH, albeit with a slight conglomerate discount which we think is fair,” they add. The privatisation is expected to be completed in December, upon approval.

As at 2.07pm, shares in SPH are trading flat at $1.98, while units in SPH REIT are trading 1 cent lower, or 1.04% down, at 95.5 cents.

Photo: Bloomberg

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