SREITs’ journey delayed but not derailed
Analysts’ top picks for REITs – Current share price vs past 3-month range
Source: Refinitiv, DBS Bank. Based on prices between 14-Nov-23 to 13-Feb-24
Note: Current share price versus 3-month high and lows. The longer/shorter the bar, the closer the current price relative to its 3-month high/low
- Market rate cut expectations were pared back on stickier US January CPI print
- CPI readings of +3.1% y-o-y and +0.3% m-o-m were higher than expectations of +2.9% and 0.2%, respectively
- Fed funds futures now estimate a 10% probability of a cut in March (vs. 36% post Feb-FOMC meeting) but still see a first cut by May (62% probability)
- DBS Economists see 4 x 25bps cuts this year starting 2H24 while also highlighting the potential for rate cuts to occur earlier than anticipated
- We think that the expected pullback on REITs opens an opportunity to add to selected names
- Be it March, May or June, the bottomline is that rate cuts are coming and the waiting time for the first cut is shorter with each passing month
- 10YUST yield rallied sharply overnight to 4.32%, and breached our 4.25% tactical resistance level
- Pullback likely to be shallow given that most SREITs are trading closer to the lower-end of their 3-month ranges, even before the Fed’s dovish stance in mid-Dec
- Our REITs analysts’ preference by sub-sector: retail (FCT, LREIT) -> office (MPACT) -> hotels (CLAS) -> industrials (FLT, MLT)
- Preference for “value” over “safety” with interest rate hikes sufficiently priced in our REITs analysts’ forecasts
- Another positive is improving risk appetite/sentiment amongst managers on recent corporate actions, e.g., FCT’s acquisition of Nex, industrial REITs’ fund raising and acquisitions
Singapore Residential
ECs still promising amid developers’ cautious stance in GLS tenders
- URA rejects bid at the Marina Gardens Crescent site
- GLS site was not awarded to GuocoLand, albeit being the sole bidder at S$770.5m or S$984 psf ppr
- The bid price was c.30% lower than an adjacent site awarded to Kingsford Development in Jun-23 and a white site awarded to IOI Properties in 2021
- Rejection of bid should stem overly opportunistic bids by developers in the future and support land prices
- Developers likely to remain optimistic on EC sites despite some caution on private condo sites
- Softer macro and a high interest rate environment likely to draw caution from developers but appetite for ECs could buck the trend given its attractive pricing and appeal to upgraders buying for their own stay, a more resilient market segment in our view.
- Our top picks in the Singapore residential market are CDL for its robust pipeline of EC and suburban launches and GuocoLand for earnings growth from its residential and investment properties.
Regional Plantation
CPO stockpile remained on a downtrend in Jan 24
- Palm oil price improved by 4% m-o-m in Jan 24
- Room for further improvement ahead on rising sunflower oil price
- Indonesia posted record-high biodiesel production in 2023
- Wilmar (WIL), First Resources (FR), Bumitama Agri (BAL) are our top BUYs in Singapore, and all eyes now on 4Q23 earnings announcement
Stocks to Watch
Keppel DC REIT
Sweet ending to a “tenant tiff”
- Amiable ending to dispute with tenant DXC, with tenant to pay KDCREIT S$13.3m (7% of DPU) by April’24
- Settlement will discharge KDC and DXC of all future claims arising for this matter of dispute
- Funds to be paid out to unitholders, which will more than offset potential income vacuum from Guangdong DC
- BUY call, TP S$2.20
ComfortDelGro
Going on the acquisition path
- ComfortDelGro Group entered into a share purchase agreement to acquire the entire share capital of CMAC Group Limited, a ground transport and accommodation service provider for businesses, for £80m (~S$135m)
- Acquisition will be funded through bank facilities and diversifies CDG’s UK operations from low margin public bus contracts
- Estimate potential earnings accretion at 0.8% to 1.0% of our FY24F earnings assuming 100% debt funding; Maintain BUY with TP of S$1.67
Far East Hospitality Trust
<FY23 Results First Take> Going from strength to strength
- Gross revenue rose 28% y-o-y to S$106.8m, FY23 DPS rose 25% y-o-y to 4.06Scts and ahead of our estimates
- Variable income saw a six-fold increase y-o-y to exceed pre-COVID levels, on a 36% y-o-y increase in hotel revenue from a low base; More upside to ensue from AEI completions and rebranding this year
- Valuation up 2.6% y-o-y mirroring peers performance within the SG market; Capital management stable with a reduction of interest rate hedge to 42.6%
- We currently have a BUY rating with TP of S$0.75; Under Review