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SPH REIT: A gradual turnaround

  • Full year DPU of 5.4 Scts ahead on lower rebates and interest cost savings
  • Portfolio occupancy resilient at 98.9%; Negative reversions still on the cards given the soft leasing environment in Singapore
  • Paragon mall a natural beneficiary as Singapore kick starts leisure travel through Vaccinated Travel Lanes
  • Maintain HOLD with unchanged TP of S$0.92
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Investment Thesis:

Maintain HOLD, TP unchanged at S$0.92; pegged to privatisation offer by Keppel Corp. SPH REIT will be part of the sponsor privatisation offer by Keppel Corporation. The offer price translates to a valuation of S$0.92 per share for SPH REIT and forms a share price cap for the REIT in our view. Should the proposed privatisation go through, the sponsor’s stake will decrease from the current 63% to below 20% and substantially increases the free float from c.29%.

A gradual turnaround in Singapore
. Shopper footfall saw decent stabilisation at c.70% of pre-COVID levels as Singaporeans grew accustomed to ‘endemic mode’. Tenant sales at has been stable despite periodic lock downs throughout the year and work from home impact. We think operating metrices will see an upward trend moving forward.

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Paragon a natural beneficiary of border reopening. We envision a more meaningful recovery to tourist traffic at Paragon in FY22 and potentially stronger domestic consumer pent up demand as shopping festivities start in 4Q21. This could propel tenant sales at Paragon back to near pre-COVID levels, similar to Dec’20.

Valuation:
Maintain HOLD, TP unchanged at S$0.92. 
The revised TP is pegged to the offer value per share by Keppel Corporation for SPH REIT, as part of the SPH privatisation consideration. We expect the stock to trade sideways for now.

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Where we differ:
Cautiously optimistic for upside to tourist footfall at Paragon as Singapore has kick started border reopening via the Vaccinated Travel Lane scheme in Sep’21.

Key Risks to Our View:
Border closures beyond 2022, prolonged operational weakness, sponsor privatisation deal not going through.

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Our Arguments: 

  • Maintain HOLD, TP unchanged at S$0.92; pegged to privatisation offer by Keppel Corp. SPH REIT will be part of the sponsor privatisation offer by Keppel Corporation. The offer price translates to a valuation of S$0.92 per share for SPH REIT and forms a share price cap for the REIT in our view. Should the proposed privatisation go through,  the sponsor’s stake will decrease from the current 63% to below 20% and substantially increases the free float from c.29%.
  • A gradual turnaround in Singapore. Shopper footfall saw decent stabilisation at c.70% of pre-COVID levels as Singaporeans grew accustomed to ‘endemic mode’. Tenant sales at has been stable despite periodic lock downs throughout the year and work from home impact. We think operating metrices will see an upward trend moving forward. 
  • Paragon a natural beneficiary of border reopening. We envision a more meaningful recovery to tourist traffic at Paragon in FY22 and potentially stronger domestic consumer pent up demand as shopping festivities start in 4Q21. This could propel tenant sales at Paragon back to near pre-COVID levels, similar to Dec’20. 
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DCF Valuation. Our discounted cash flow valuation factors in a (i) 2.0% risk free rate, (ii) 0.85 beta, (iii) 6.44% WACC and (iv) 1.5% terminal growth to derive a target price of S$0.92. Our target price assumes a 1.0x price-to-book and a forward 7.3% dividend yield, with a DPU growth of 35% from FY20 and FY21. 
We have factored in a lower occupancy of 95% at Paragon, with a negative rental reversion of 5% in FY21, maintaining a conservative stance that a slower recovery profile is likely. The S$14.5m that was retained this financial year will see mandatory payment by August 2021 under the MAS rule, which may boost DPU in FY21. We think that SPH REIT will likely even out distributions in the coming few years, by adjusting the payout ratio.  

We have adjusted the payout ratio to 80% in FY21 and 90% thereafter from the historical 100% in view of the REIT’s cash conservation mode. Target price remains unchanged at S$0.80 as we roll forward valuation base to FY21. 

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Where we differ:
Cautiously optimistic for upside to tourist footfall at Paragon as Singapore has kick started border reopening via the Vaccinated Travel Lane scheme in Sep’21.