A year of recovery
- FY21 net property income grows 14.9% y-o-y to S$41.8m
- Total DPU for FY21 stands at 2.17 Scts
- Return of Hefei Mengchenglu to drive DPU growth in FY22F
- Maintain HOLD with TP of S$0.57
Investment Thesis
DPU miss hints at possible protracted recovery. While FY20 was undoubtedly the bottom of BHG REIT’s three-year declining DPU trend, its recovery is expected to be slower, as FY21 DPU numbers did not bounce back as quickly as anticipated. Still, we maintain our FY22F estimates, as Hefei Mengchenglu is set to make a bigger contribution this year following disruptions from its AEI in FY21. With yields of c.5.0% and limited upside to our TP, we maintain HOLD.
Potential to deliver strong organic growth in the medium term. BHG REIT offers investors a good mix of growth and stability. We note that the REIT has exposure to three properties located in Hefei and Chengdu, where urban disposable income grew at five-year CAGRs of 8.5% and 7.9%, respectively, outpacing Beijing’s 7.2%. Correspondingly, retail spending in Hefei and Chengdu grew at faster five-year CAGRs of 16.6% and 7.3%, versus 5.7% in Beijing. With the ongoing tenancy remix, we believe BHG REIT’s assets in Hefei and Chengdu have the potential to deliver strong organic growth in the medium term.
Acquisition offers upside to estimates. BHG REIT has a right-of-first-refusal (ROFR) over c.10 assets. The pipeline of assets may expand beyond the ROFR, with previously proposed acquisitions that are outside the ROFR. We understand that the manager remains keen to tap into the sponsor’s pipeline to accelerate its growth.
Valuation:
Maintain HOLD with a DCF-based TP of S$0.57, based on a WACC of 8.0% and terminal growth rate of 2.75%. Our TP implies a FY22F target yield of 4.8%.
Where we differ:
We are the only house covering the stock and have assumed a more conservative recovery for FY22F.
Key Risks to Our View:
A surge in COVID-19 cases, leading to restrictions in Beijing, Chengdu, or Hefei, and a higher-than-expected shift in retail spending to the online space.