• Resilient portfolio
• Room for inorganic growth
• Upgrade to BUY with higher FV

Offering stability amid market volatility

We view SPH REIT as a solid investment proposition amid vagaries in the macroeconomic landscape, given its resilient portfolio and stable earnings profile. Despite headwinds facing Singapore’s retail sector, SPH REIT managed to deliver positive rental reversions of 4.9% for Paragon (27.0% of NLA) and 4.5% for The Clementi Mall (TCM) (11.0% of NLA) for 9MFY16. Both malls were also fully leased, as at 31 May 2016, a reflection of their strong positioning within their respective catchment areas.

Potential inorganic growth supported by strong balance sheet

We believe one growth driver for SPH REIT would come inorganically from its potential acquisition of Seletar Mall, which is 70%-owned by its sponsor SPH. SPH REIT has a right-of-firstrefusal on its sponsor’s stake, which has a carrying value of S$495m, as at 31 Aug 2015. Given SPH REIT’s healthy gearing ratio of 25.7%, we believe it will be able to comfortably finance this acquisition wholly by debt. If this materialises, we estimate that SPH REIT’s gearing ratio would increase to ~35.4%.

Further analysis based on a passing rent assumption of ~S$14 psf/month, 100% occupancy rate and 60% NPI margin (asset not fully stabilised yet) suggests that this transaction could potentially add 3-4% to SPH REIT’s DPU on an annualised basis, based on our projections.

Laggard local retail REIT play; upgrade to BUY

SPH REIT’s share price has underperformed other Singapore focused retail REITs YTD. This is despite the fact that its DPU growth profile exhibited a similar trend to these peers during the 2QCY16 results period, recording a low single-digit YoY growth. Valuations are also undemanding, in our view. SPH REIT is currently trading at FY17F distribution yield of 5.9% and P/B of 1.01x.

The former is approximately 1.2 standard deviations (SD) above its historical average forward yield since its listing, while the latter represents 1.1 SD below its historical forward mean.

As we lower our risk-free rate assumption from 3.0% to 2.4% and roll forward our valuations, we derive a higher fair value of S$1.05 (previously S$0.99). Supported by expected total returns of ~17%, we upgrade SPH REIT from Hold to BUY.

Source: OCBC Research - 3 Aug 2016