SPH REIT – DBSV

Steady ship in the inaugural year

• 4Q14 DPU of 1.39 Scts exceeded forecast by 6.1%
  
• Positive rental reversions; NAV up 4.4%
  
• Maintain HOLD, TP revised to S$1.03
  

Highlights

DPU of 1.39 Scts exceeded IPO forecast by 6.1%.

• Revenue and net property income of S$51.1m and S$38.0m were 2.6% and 5.6% higher against forecast. Portfolio rental reversions remained strong – Paragon achieved rental uplifts of 10.5% YTD, while Clementi Mall secured 5.5% higher rents YTD. However, we note that tenant sales for Paragon and Clementi mall were down 4.5% and 3.3% y-o-y, respectively, while foot traffic remained stable. The property portfolio was revalued up by c.3.4% to S$3.05bn, lifting NAV per share by 4.4% to S$0.93. Gearing headed lower to 26.0% as a result.
  

Investment Thesis

Stable Earnings Outlook

• With rentals already at market rates and retailers outlook still fairly weak due to the decline in tourist arrivals and poor retail sales, further rental hikes at both Paragon and Clementi Mall going forward appear modest. Limited acquisition prospects in the near term
  
• Seletar Mall (its ROFR asset from its sponsor, SPH) is expected to complete in Dec’14 and is the next main growth catalyst for the SPH REIT. However, we believe an acquistion timeline for this mall to come only in 2016 onwards after stabalization. Till thn, we see limited scope for acquistions.
  

Valuation

HOLD. Target Price S$1.03. Our revised target price of S$1.03 is based on DCF after accounting for lower units/debt levels. At current price, the stock appears fairly valued at a forward yield of 5.4%. We maintain our HOLD call given its premium valuations vs peers.

Risks

Interest rate risk

• SPH REIT will be negatively impacted when its loans are refinanced in an environment of rising interest rates. This risk is mitigated through having a staggered debt maturity profile with nil refinancing till 2016. Reported average interest cost of 2.33% is slightly lower than IPO forecast of 2.35%.