SPH REIT upgraded to ‘buy’ on potential mall acquisition

SINGAPORE (March 16): DBS Group Research has upgraded SPH REIT to “buy”, from “hold” previously, and raised its target price by 3% to S$1.03.

In a report on Thursday, DBS lead analyst Derek Tan says it is “very likely” that SPH REIT could acquire The Seletar Mall from its sponsor “in the next 12 months”.

While the timing and price of the potential acquisition are uncertain, Tan says the transaction is likely to be at a price “marginally higher than the current appraised value of S$495 million (RM1.56 billion).”

“We believe that it is an opportune time for SPH REIT to consider acquiring The Seletar Mall from its Sponsor, most ideally within the next six months prior to the asset undergoing its first renewal cycle at the end of 2017,” says Tan.

“We believe there is room for rental uplift, and hence SPH REIT can benefit from this if it acquires The Seletar Mall before the renewal period,” he adds.

Assuming an optimal funding scenario which involves partial equity funding of S$200 million and debt financing of S$300 million, Tan estimates a 3-4% rise in SPH REIT’s distribution per unit (DPU).

Post the acquisition, gearing will be increased to 31%, from 26% currently. However, Tan says this is “still conservative” compared to peers’ average of 34%.

SPH REIT in 1Q posted a 0.8% increase in DPU to 1.34 Singapore cents on the back of positive rental reversions from both of its mall properties.

Income available for distribution to unitholders in the quarter ended Nov 30 increased 3% to S$36.4 million, compared to S$35.3 million a year ago.

“Most importantly, we see improved liquidity in the stock, which will be positive for stock prices,” Tan says, adding that upside from this potential acquisition is not yet priced in.

In addition, Tan believes SPH REIT will enjoy higher diversity and resilience as The Seletar Mall, located in the west of the Sengkang subzone in the north-east region of Singapore, will allow it to derive a higher proportion of its income from necessity shopping.

“There are no large or mega malls in the Sengkang subzone,” Tan notes. “With Seletar Mall, we are positive that SPH REIT’s portfolio will see stronger performance in the medium term.”

As at 12.25pm, units of SPH REIT are trading 1 Singapore cent higher at 97.5 Singapore cents. — theedgemarkets.com.sg

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