Sabana – Phillip

Company Overview

Sabana REIT is a Singapore-based REIT with a mandate to invest in income-producing industrial real estate and real estate-related assets in Singapore and Asia with compliance to Shari’ah investment principles.

• Factored in the yield-accretive acquisition of 23 Serangoon North Avenue 5
  
• Maintain accumulate with revised target price of $1.07
  

What is the news?

Sabana REIT had concluded the acquisition of 23 Serangoon North Avenue 5 at S$61.0mn. The purchase was partially funded from the S$80.0mn Convertible Sukuk at a rate of 4.5%. Besides that, the additional Murabaha

facilities of $258.6mn were refinanced in August at a lower interest rate of 4.1% relative to the existing all-in cost of 4.4%.

How do we view this?

By factoring the new purchase and interest cost-savings to our model, we raise our price target from S$1.04 to S$1.07. Post acquisition, the gearing ratio is expected to hit c.37.6% based on the earlier announcement and this translates to c.S$25.9mn of debt headroom. With the first Convertible Sukuk successfully taken up by institutional investors, we reckon it will pave the path for future debt financing other than conventional loans. Although Convertible Sukuk is a cheaper alternative compared to equity fund raising, we do not rule out Sabana REIT to do a private placement or rights issuance given sizeable property acquisitions going forward.

Investment Actions?

We maintain our assumption of having the payout ratio at 94.0% from 2013-2016 and expect occupancy to fall at the end of 2013 as the head tenants may choose not to renew the contracts when the bulk of the master leases expired. Hence, FY13 DPU will slide down first before reversing. If the payout ratio is taken out from our assumption, our price target could have jumped to S$1.13. Upside risks may come in the form of potential positive rental reversion from the properties that are expiring in 2013 and revaluation surplus of its portfolio for FY12.

Despite the price has performed exceptionally well and exceeded out price target, the high forward yield of 7.6% is likely to remain compelling among the S-REITs universe given the current yield-starved period. The yield spread against 10yr bond yield is around 6.2% and thus Sabana REIT’s trading yield may be compressed further as being one of the high-yielding securities with stable and sustainable income stream. Maintain Accumulate.