FY22 results: Paragon awaits the return of Chinese spenders
- Full year DPU of 5.52 Scts ahead of estimates and on a 96% pay out ratio
- Key positives: (i) NPI margins improved 1.3ppt to 74.4% driven by higher revenues, (ii) Reversions continue to be in the negative territory at -2.3% but negative gap narrowed considerably in comparison to 2021 (-8.4%), (iii) Higher y-o-y tenant sales performance across all Singapore retail assets
- Datapoints to watch: (i) Higher tourist spend at Paragon mall going into 1QFY23 (quarter ending Dec) to see potential festive boost, (ii) China reopening news as a key catalyst for Paragon mall
- Estimates under review – We currently have a HOLD call on SPH REIT with a TP of 96.4Scts, SPH REIT is trading at a forward FY23 yield of 6.1%
Full year DPU at 5.52 Scts ahead of estimates on improved NPI margins
- SPH REIT announced full year results revenue of S$281.9m (+1.7% y-o-y).
- NPI at S$209.7m (+3.5% y-o-y) was ahead of estimates on lower property expenses, which saw a 3.2% y-o-y decline.
- NPI margins improved from 73.1% in FY21 to 74.4% in FY22, driven by lower rental relief. Full impact of heightened electricity costs, which make up c.3-4% of operating expenses, continue to be shielded by utilities contracts.
- Distributable income at S$154.8m (+3.1% y-o-y) is on a 96% pay out ratio for the year.
- Correspondingly, full year DPU at 5.52 Scts, representing a 2% y-o-y increase, is ahead of estimates.
Diminishing gap on negative reversions
- Occupancy at a portfolio level remains high at 97.5%.
- This is supported by a high tenant retention ratio of 82.9%.
- Reversions for Singapore malls was at -2.6% (Paragon reversions at -2.7%, Clementi mall reversions at -3.8%), while Australia reversions came in at -3.9%.
- We note that the reversionary gap has closed substantially in comparison to 2021 levels, which was closer to the double digit negative range at -8.4%.
- Paragon mall sales rose 26% y-o-y, driven by higher spending by domestic shoppers and 5 months of greater tourist spend captured within this financial year.
- Clementi mall sales continue to track higher than pre-covid levels.
Paragon sales boost awaits the return of Chinese spenders
- We continue to view Paragon as a key beneficiary to border reopening with the steady increase in tourist arrivals m-o-m since borders reopened in April.
- Chinese and Indonesian tourists make up the spending titans at Paragon mall, contributing c.3million to shopper traffic respectively.
- Outperforming trade sectors continue to be the usual suspects being watches and jewellery at Paragon mall.
- While improvement in tenant sales was across the board at Clementi mall.
Capital management shielded by prudent balance sheet
- Cost of debt is currently at 1.77% and on a 71% fixed hedge.
- Assuming 100% floating rate, we understand that every 10 bps increase in interest cost translates to a higher interest expense of c.S$1.3m or a -0.03 Scts impact on the DPU level.
- SPH REIT’s gearing stood at 30% as at 30th August 2022, and continue to be one of the lowest across the S-REITs sector.
- Weighted average debt maturity stand at 2.5 years, while interest coverage stood at 5.2x.
Higher valuation on improved retail outlook
- Singapore assets recorded higher valuations, rising from S$3,296m to S$3,339m (+1.3% y-o-y)
- Australian assets saw a similar uplift, increasing 0.8% y-o-y.
- Capitalisation rates for both markets remains unchanged with higher valuation based on better operational outlook.
- Singapore retail cap continues to be in the range of 4.5% (Paragon, Clementi mall) and 6.0% (The Rail mall).
