SPH REIT
SK6U.SI
SPH REIT - Potential influx of new traffic to Paragon
Stock is fairly priced.
- We currently have a HOLD recommendation, with TP of S$1.00.
- SPH REIT's dividend yield of 5.7% reflects the strength of its assets and stability of earnings. However, at this point we believe that comparable retail S-REITs offer more attractive yields.
Paragon to continue to drive earnings growth.
- We believe that Paragon will continue to outperform the rest of Orchard Road for both retail and office assets, due to its
- location and frontage in the prime Orchard Road shopping district, as well as
- proximity to the Mount Elizabeth medical cluster.
- As such, we assume reversions of 3.5-4.0% for Paragon. A linkbridge connecting Cairnhill redevelopment and Paragon, to be opened in November/December 2016, may draw new traffic to the mall.
- At Clementi Mall, more than 50% lease expirations in FY17 could set a new base for rent.
Potential acquisition a catalyst.
- With a healthy gearing of 25.7% and cost of debt of 2.82%, SPH REIT is well poised for debt- funded acquisitions.
- The next growth catalyst for the REIT will be the acquisition of the Sponsor’s 70% stake in Seletar Mall. However, we believe this acquisition is likely to be more of a medium term-prospect, as the mall was only completed in December 2014 and is still on its first lease cycle.
Valuation
- We have a DCF-backed target price of S$1.00, implying a dividend yield of 5.7% for FY17F-18F.
- Due to the lack of near- term catalysts and limited upside to TP, we maintain our HOLD call.
Key Risks to Our View: Short WALE due to lease expirations at Clementi Mall.
- The portfolio has a relatively short WALE of 2.3 years by NLA. 18.5% of portfolio NLA (c.166,000 sqft) will expire in FY17. The majority comes from Clementi Mall where more than 50% or close of 104,000 sqft of the mall’s NLA are due in the next 12 months.
Derek Tan
DBS Vickers
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http://www.dbsvickers.com/
2017-01-04
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