SPH REIT - DBS Research 2022-10-11: Paragon Awaits The Return Of Chinese Spenders

SPH REIT - Paragon Awaits The Return Of Chinese Spenders

  • SPH REIT announced full year 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 reliefs. Full impact of higher electricity costs, which make up ~3-4% of operating expenses, continue to be shielded by utility contracts.
  • SPH REIT's distributable income of S$154.8m (+3.1% y-o-y) is on a 96% pay-out ratio for the year. Correspondingly, full year distribution at S$0.0552 per unit, representing a 2% y-o-y increase, was ahead of estimates.
  • Occupancy at a portfolio level remains high at 97.5%. This is supported by a high tenant retention ratio of 82.9%.
  • Reversions for SPH REIT's 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 full year portfolio reversions at -2.8% has narrowed substantially in comparison to 2021 level of -8.4%.
  • Paragon mall’s 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.
  • 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 ~3million to shopper traffic respectively. Outperforming trade sectors continue to be the usual suspects being watches and jewellery at Paragon mall. Improvement in tenant sales was across the board at Clementi mall.
  • SPH REIT's cost of debt is currently at 1.77% and on a 71% fixed hedge. On a 100% floating debt assumption, we understand that every 10 bps increase in interest cost translates to a higher interest expense of ~S$1.3m or a -0.03 cents impact on DPU.
  • SPH REIT’s gearing stood at 30% as of 30th August 2022 and continues to be one of the lowest across the S-REITs sector. Weighted average debt maturity stood at 2.5 years, while interest coverage was 5.2x.
  • Higher valuation on improved retail outlook – SPH REIT's 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 unchanged with higher valuation based on better operational outlook. Singapore retail cap rates continues to be in the range of 4.5% (Paragon, Clementi mall) and 6.0% (The Rail mall).
  • Maintain HOLD rating on SPH REIT's with target price at S$0.96.
  • SPH REIT's stands as one of the key beneficiaries of Singapore’s reopening with the largest exposure to Orchard retail, with Paragon mall anchoring 65% of its portfolio (by asset valuation). SPH REIT's Share Price trades at a compelling yield of 6.1% on a forward basis and below book (0.97x price-to-book).

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2022-10-11

Previous report by DBS:
2021-10-05 SPH REIT - A Gradual Turnaround.

Price targets by other brokers at SPH REIT Target Prices.
Listing of research reports at SPH REIT Analyst Reports.

Relevant links:
SPH REIT Share Price History,
SPH REIT Announcements,
SPH REIT Dividends & Corporate Actions,
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