SPH REIT – OCBC

Stable performance

  • 1QFY15 DPU grew 2.3% YoY
  • Positive rental reversion of 12.4%
  • Valuations not cheap

1QFY15 results came in within our expectations

SPH REIT reported its 1QFY15 results which were in-line with our expectations. Revenue inched up 1.8% YoY to S$50.6m on the back of higher rental income. This formed 24.6% of our FY15 forecast. Distribution to unitholders and DPU grew 2.9% and 2.3% to S$33.5m and 1.33 S cents, respectively, with the latter constituting 24.4% of our full-year projection.

Healthy rental reversions achieved

Both SPH REIT’s Paragon and The Clementi Mall remained fully leased. Overall rental reversions of 12.4% was achieved for its portfolio in 1QFY15, driven largely by Paragon (+12.5%) and marginally by The Clementi Mall (+2.3%), although the latter had only one lease renewal during the quarter. In terms of asset enhancement initiatives, the chiller decanting project at Paragon will create an additional 5,000 sq ft of NLA when it is completed by FY16.

Tenancies for the new space have already

been committed and are expected to contribute an incremental rental income of close to S$1m per annum. Management is also carrying out planning works to create another NLA of 5,000 sq ft at Paragon. This would be phased in from FY16.

Maintain HOLD

Looking ahead, headwinds facing the retail sector will continue to pose challenges to the operating landscape. Nevertheless, average prime retail rents in Orchard Road still managed to increase marginally by 1% on a YoY and QoQ basis to S$34.55 psf pm in 4QCY14, according to CBRE. This highlights the attractiveness and value of assets which are strategically located in good catchment areas. We maintain our HOLD rating and S$0.99 fair value estimate on SPH REIT, as we believe its current valuations look fully priced. The stock is trading at FY15F P/B of 1.1x and distribution yield of 5.2%, versus its retail peers’ forward P/B of 1.0x and distribution yield of 6.1%.