SINGAPORE (Apr 8): Maybank Kim Eng is reiterating its “hold” call on SPH REIT with an unchanged target price of $1.05 on expectations of limited retail sales growth.

Instead, the research house prefers Frasers Centrepoint Trust (FCT), rated “buy” with a $2.60 target price, for its suburban-mall footprint and a 6% three-year DPU CAGR.

This comes post the release of SPH REIT’s 2Q19 results last Friday, which came in line with Maybank’s estimates with 0.7% y-o-y growth in quarterly DPU to $1.41 cents.

“While we expect a recovery in prime Orchard Road rents due to tight supply supporting further positive rental reversions at Paragon, the sales growth outlook for its tenants could be capped by falling tourism shopping receipts,” says analyst Chua Su Tye in a Monday report.

“We remain selective on retail REITs and expect larger-destination malls [e.g. Mapletree Commercial Trust’s VivoCity] to do better. Investors need patience as there is limited visibility on its long-discussed potential Seletar Mall deal.”  

In view of tight supply at Orchard Road, Chua is forecasting SPH REIT’s rents at Paragon to rise by 3-5% in FY19-20E even as the trust saw positive rental reversion across all of its three Singapore malls over 1H19.

He also believes the REIT’s balance sheet remains sound despite increased aggregate leverage and higher average cost of debit, which rose largely due to AUD-denominated borrowings.

Going forward, the analyst highlights Seletar Mall as SPH REIT’s “key potential sponsored deal” in Singapore, as buying the asset could add 7-10% to its FY19-20 DPU, assuming that the deal is acquired on a 100% interest basis and is fully debt-funded.  

“AUM increased by 6.2% h-o-h due to two deals, including its first overseas asset, but we believe investors are awaiting more sizeable acquisition growth opportunities given an almost $1 billion in debt headroom… Also, [SPH REIT’s] gearing is low versus peers,” says Chua.

As at 10:40am, units in SPH REIT are trading flat at $1.06, which implies a FY20E DPU yield of 5.5%. FCT is trading flat at $2.37.