Just the first step into property. We raise our target price to SGD4.95 after factoring in REIT benefits. BUY SPH. This is just the first step of what is likely to turn out to be a multi-year value unlocking process. SPH’s confirmation of a retail REIT spin-off in the future adds another, more exciting dimension to the stock. We have long speculated that it could become more aggressive on the property front, and this has materialised. The greatest concern right now is its limited supply of sponsor assets, which can be overcome by introducing new partners, more acquisitions or expanding overseas.

Immediate benefits from spinoff. We believe the proposed REIT can fetch a potential distribution yield of 5.6%, relatively attractive when compared to the average S-REIT yield of 5.3% at this end of the yield compression cycle and even lower returns from fixed income. The market now expects a special dividend from the spinoff, which we have estimated at SGD1b (SGD0.63 a share) assuming tax savings from a REIT structure and debt repayment.

Looking beyond. However, we believe that the market has not yet fully factored the upside from property in the long term. Options include (1) roping in asset owner partners to expand the asset pipeline, (2) directly acquiring suitable assets in Singapore, and/or (3) expanding outside Singapore to other countries. Partners are likely to be smaller asset owners that cannot form their own REIT and that may find it more convenient to work with a big player who can provide the financial heft and management muscle.

Thinking outside the box. BUY. We maintain BUY on SPH, with a raised target price of SGD4.95 based on SOTP. Dividend yield still looks attractive at 5.7% even after recent share price surge. We believe we are the first broker to highlight the possibility of potential partners that would address concerns that, as sponsor, it does not have a long enough tail of injectable assets, and extend SPH’s attraction as a property play to augment its waning media business.

Source: Maybank Kim Eng Research - 21 Mar 2013