SPH REIT (SK6U.SI) is a Singapore-listed retail real estate investment trust with a real estate portfolio in Singapore and Australia. It currently owns the Paragon Mall, The Clementi Mall, The Rail Mall in Singapore and a stake in Figtree Grove Shopping Centre in Australia.

Overview:

(+) Healthy credit profile

(+) Properties with high occupancy rates provide stable income

CREDIT VIEW

(+) Healthy credit profile – As at 31 May 2019, the REIT’s gearing ratio stood at 30.1%, below its peers’ average. Its average cost of debt was 2.89% and net interest coverage was at a healthy 6.0x, higher than its peers’ average. The current low-interest rate environment, coupled with the REIT’s low gearing and high debt headroom of almost SGD1bn, provide a conducive environment for future acquisitions in Australia and Singapore.

Debt maturities are staggered evenly over the next few years, with the weighted average term to maturity standing at 1.8 years. As at 31 May 2019, 70% of loans were secured at fixed rates, reducing interest rate risk.

(+) Properties with high occupancy rates provide stable income – As at 31 May 2019, overall portfolio occupancy was at 99% with positive rental reversions stable at 8.4% YTD. Paragon and The Rail Mall enjoyed positive reversions of 8.6% and 9.1% respectively. The REIT also posted a 4.4% y-o-y growth in shopper traffic across its Singapore portfolio.

The REIT’s portfolio lease expiry is evenly spread out over the next few years, allowing for more stable positive rental reversions as leases expire and require renewals.

Majority of leases in Paragon, the highest contributor to net property income, were recently renewed. Upcoming lease expiries include 70% of leases for The Clementi Mall is due in FY20, 80% for The Rail Mall due in FY19-20F and 14% for Figtree Grove Shopping Centre due in 4QFY19. These are opportunities for positive rental reversions and optimizing tenant mix.

Source: Phillip Capital Research - 21 Aug 2019

European shares fell on Tuesday after two sessions of robust gains as optimism over hopes of stimulus in major economies waned and investors awaited more guidance from central banks.

Wall Street stocks fell on Tuesday, snapping a three-session winning streak amid lingering unease over global growth and the US-China trade war.

SINGAPORE equities continued to sail ahead on Tuesday on investor hopes of accommodative central bank policies, fiscal stimulus by governments and what appears to be an easing of tensions between the US and China.

DIRECTORS and legal counsel of Pine Capital Group subsidiary Advance Capital Partners Asset Management (ACPAM) were replaced at an extraordinary general meeting (EGM) on Aug 12, Pine Capital announced in a Singapore Exchange filing on Tuesday.

SOILBUILD Business Space Reit tenant NK Ingredients, which owes almost S$3.4 million to the real estate investment trust, has been put under judicial management, said the Reit's manager in a filing on Tuesday.

Three new firefighting vessels, including one the Singapore Civil Defence Force (SCDF) touted as the “world’s most powerful firefighting vessel”, was commissioned by Home Affairs and Law Minister K Shanmugam. SCDF worked closely with the Defence Science and Technology Agency, as well as local shipbuilders Penguin International and ST Engineering’s Marine arm. (https://www.youtube.com/watch?v=ctJRC0vQ0Fw)

Source: SGX Masnet, The Business Times, Bloomberg, Channel NewsAsia, Reuters, PSR

A former Walt Disney accountant has accused the company of overstating revenue for years and has filed a series of whistleblower tips with the US Securities and Exchange Commission.

European shares ended higher for a second straight session on Monday on signs that measures would be adopted to prop up growth in major economies, while bond yields rebounded amid improved global sentiment plagued by recession worries.

Wall Street stocks rose for a third straight session on Monday, joining a global rally amid talk of economic stimulus in Germany and China and expectation of further Federal Reserve interest rate cuts.

HONG Leong Asia's takeover offer for its Malaysian subsidiary Tasek closed at 5pm on Aug 19, with Hong Leong Asia holding an 88.16 per cent stake.

Source: SGX Masnet, The Business Times, Bloomberg, Channel NewsAsia, Reuters, PSR

• 2Q19 results missed our estimates. We slashed our FY19e earnings by 32%. Transaction volumes were much weaker than our initial assumptions.
• PropNex maintained its impressive market share of new launches at around 48%. It expanded its agency force by 649, the most in the industry this year. PropNex maintains its status as the largest real estate agency in Singapore with 8049 agents.
• Net cash of S$73mn and interim dividend payout of 81% (or S$ 1.25 cents).
• We maintain our BUY recommendation. Our target price is lowered to S$0.59 (previously S$0.63). We cut our FY19e and FY20e net profit forecast by 32% and 35% respectively. Our target price was cut less materially as we lowered our estimates in working capital required.

The Positives

+ Market share has crept up. Market share for PropNex for new launches in 2Q19 is around 48%. This has climbed from around 43% last year. The company’s aggressive and consistent engagement sessions and seminars with consumers have been one of the distinguishing factors to their rise in market share. Consumers gain more confidence when there is a better understanding of the market and project. The number of agents for PropNex has risen by around 649 or 9% this year to 8,079. PropNex has expanded its agency force the most this year. 

+ Building the foundation overseas. The agency force in Indonesia, Malaysia and Vietnam continues to build up. The combined number of agents in these three countries are around 2,100 agents. Vietnam agency was started this year.

The Negatives

– Private resale revenues the worst hit. Resale revenue was down around 47% YoY in 2Q19. Transactions have collapsed as owners are holding on for higher prices. Interest rates are falling and there is generally no urgency to sell.

– Soft HDB prices affecting demand and re-issuance of option. Mass market demand is dependent on HDB upgraders. However, there is less equity (or gains) that can be extracted as HDB prices have been less rosy. During the 2007-13 period, HDB resale prices doubled (Figure 1). However, since the 2013 peak, HDB prices are down 12%.  There will be less equity for the estimated 30,000 HDB units completing their 5-year minimum occupancy period this year. A larger portion of buyers being HDB upgraders and resale market turning less vibrant, are some of the reason for the larger occurrence of options re-issuance. This delays the recognition of revenue for the agents.

Outlook

We expect 2H19 to improve. We have seen a significant rebound in July 2019 transactions.  There will be 45 projects (17,000 units) to be launched in 2H19. The sentiment is admittedly weak. Nevertheless, some of the reasons prompting the purchase of private properties include (i) private property prices will remain elevated due to the high land cost of developers; (ii) continue building an asset base for retirement and wealth transfer for future generations.

Maintain BUY with a lower target price of S$0.59 (prev. S$0.65)

We maintain our BUY recommendation. Our target price is lowered to S$0.59 (previously S$0.63). We cut our FY19e and FY20e net profit forecast by 32% and 35% respectively. Our target price was cut less materially as we lowered our estimates in working capital required. Whilst industry volumes are down this year, PropNex has managed to expand its market share and agency force this year. We like PropNex for the high unleveraged return on equity, strong balance sheet, attractive dividend yield and impressive cum rising market share.

Source: Phillip Capital Research - 19 Aug 2019

• Revenue met our estimates but EBITDA was modestly better than expected due to the significant fall in content cost.
• Both subscribers and ARPU for cable TV still trending down. Broadband revenues finding some stability on a QoQ basis.
• Capital expenditure remains elevated at almost 25% of revenue (1H19) vs 22% a year ago (1H18).
• The attraction of APTT is the committed two-year DPU of 1.2 cents per year (or yield of 7.1%). The yield stands out in the current environment of depressed interest rates. We raised our target price marginally to S$0.165 as we increased our EBITDA forecast and lowered our interest expense assumptions. We peg APTT at around 9.5x EV/EBITDA. This is a 15% discount (prev. 10%) to their much larger Taiwanese peer valuations. We are upgrading our recommendation from REDUCE to NEUTRAL.

The Positives

+ Gap down in content cost. Broadcast cost was down 21% YoY. As a percentage of total revenue, there was a saving of 2.8% points compared to a year ago. APTT has signed new three year agreements at much lower prices. Content cost is entirely on fixed cost basis.

+ Broadband revenue starting to stabilise. In broadband, APTT quarterly revenues have been on a downtrend since the S$13.1mn peak, four years ago.  Subscriber growth has grown but pressure on ARPU has dragged down revenues.  Cable TV ARPU has been sliding for almost three years. This quarter, broadband revenues have started to stabilise on a QoQ basis as subscriber growth has been strong (+2% QoQ). ARPUs are under pressure by aggressive pricing of unlimited mobile price plans.

The Negatives

– Cable TV operating metrics still sliding. The decline in TV subscribers since 1Q18 persist.  ARPU is also contracting for the past twelve consecutive quarters. There are no signs the weakness in operations is abating anytime soon.

– Capex still elevated. No guidance has been given on capex for FY19 except it will taper down in FY20. Capex is to build up future backhaul business especially with the arrival of 5G. As present, capex is now ~25% of revenue compared to 22% in 1H18. We modelled 22% of revenue capex. The high capex has aggressively cut FCF down by 41%.

Outlook

Both pricing and subscriber base for APTV core cable TV business is declining (Figure 1). The lower broadcast cost was a welcomed surprise to lower the fixed cost structure of the cable TV business. Broadband is more profitable than cable TV. However, the fall in ARPU is not sufficient to stem the decline in total broadband revenues despite growing subscriber base.

Upgrade to NEUTRAL and target price of S$0.165 (previously  S$0.16)

We raised our target price marginally to S$0.165 as we increased our EBITDA forecast and lowered our interest expense assumptions. We peg APTT at around 9.5x EV/EBITDA. This is a 15% discount (prev. 10%) to their much larger Taiwanese peer valuations (Figure 2). We are upgrading our recommendation from REDUCE to NEUTRAL.

The attraction of APTT is the committed two-year DPU of 1.2 cents per year (or yield of 7.1%).  The dividend yield stands out in the current environment of depressed interest rates. APTT has sufficient cash-flow over the next two years to cover their guided 2-year DPU guidance.

Source: Phillip Capital Research - 19 Aug 2019

• 2Q19 was down -19.3% YoY due to timing difference of residential handovers in China and Vietnam (back-ended into 2H19, Figure 1 and 2).
• Gradual relaxation of the price caps in China led to a 19% QoQ increase in sales price for 2Q19 – sales momentum remains healthy.
• Expanding recurring income stream through fund management platform and management contracts via Lodging segment (Ascott).
• Deleveraging a near-term focus. Aggressive divestment of non-core assets will help CAPL achieve 0.64x gearing ahead of 2020 target.
• Upgrade to BUY with higher TP of S$4.20, due to incorporation of CAPL-ASB merger.

The Positives

+ Deleveraging on track. Post CAPL-ASB combination gearing reached a historical high of 0.73x (FY17/FY18 0.49x/0.5x), in line with management expectations. The management has set forth a plan to deleverage to 0.64x net debt/equity by end-2020 through their annual asset recycling target of S$3bn. Total divestments for 1H19 reached S$3.4bn, of which $1.2bn have been completed. CAPL is on track to reach their 0.64x gearing ahead of the end-2020 target. Divestments net of investments, on an effective-interest basis, for YTD 8M19 was $1.2bn. Capital recycling efforts have unlocked $135mn ($171mm excluding ABS-related transaction costs of $36mn) in capital gains.

+ NPI-growth driven revaluation gains. 2Q19 revaluation gains contributed $346.5mn (60%) to total PATMI, however these revaluation gains were operationally driven – 10 properties of the properties (Figure 3) accounted for c.58% of the revaluation gains reported higher NPI yields. Average portfolio NPI yield for 1H19 was 4.5%, an increased from 4.2% in FY18.

The Negatives

– China sell-through rates for units launch in 2Q19 deteriorated to 80% (1Q19 c.90%). However, overall sales rate remained healthy at 93% of all launched units and management commented that the demand from upgraders and first-time owners is still strong. CAPL strategy to pace their launches to wait out the easing of price caps has yielded 19% QoQ increase in sales price for 2Q19.This is after the 53% QoQ growth in sales price in 1Q19. On a half-year basis, units sold and sales values were 73% and 31% higher YoY.

Outlook

The outlook is positive. The gradual relaxation of the price caps in China has yielded 53%/19% QoQ increase in sales price for 1Q19/2Q19. We remain optimistic about the remaining 3,078 units to be launched in 2H19.

In Singapore, CAPL achieved healthy sell-through rates of 72.5% (or 27% of total project) at the launch of One Pearl Bank in July 2019 and will be launching the Sengkang Central mixed-use development (JV with CDL) in 3Q19.

CAPL’s recurring income portfolio continues to be grounded on healthy operating metrics and will increasingly be the bedrock of its earnings. The merger with ABS increased the number of private funds from 17 to 23. Fund assets under management grew 28.1% from S$55.1bn to S$70.6bn.

The signing of c.7,100 keys YTD19 brings the number of keys under management to 107,154. If the signing momentum persists, CAPL’s Lodging segment will be on track to achieve its 160,000 key target by 2023. The Lodging segment made up 14.4% of 1H19 EBIT ($291mn/$2,061mn), of which 41% ($118mn) was attributed to recurring fee income from management contracts. Currently, 44% (47,480 units) are still under development and do not contribute fee revenue. We expect the Lodging segment to play an increasingly important role in supporting CAPL’s recurring income and as more units come online. The management previously guided that upon stabilisation, every 10,000 keys will generate c.S$25mn of fee income.

Apart from the potential redevelopment of Liang Court, together with CDL and the two listed trusts, ART and CDLHT, CAPL mentioned that the group will be looking into the possible rejuvenation of the industrial assets in the Jurong area.

Upgrade to BUY with higher TP of S$4.20 (prev. S$4.00).

We update our forecasts to reflect the incorporation of ASB and raise our TP to S$4.20. Our target price translates to a FY19e P/NAV ratio of 0.75x.

Source: Phillip Capital Research - 19 Aug 2019