• SPH acquired S$321m of UK PBSA assets; portfolio decent with 6.3% net initial yield and adjustment mechanisms for downside protection.
• Acquisition offers an estimated 6% accretion to FY17 core earnings, and increases net gearing slightly to 0.41x, based on our forecasts.
• We believe media rejuvenation is still a priority for SPH, with cash-yielding assets as its new growth engine.
• We expect more acquisitions to come for greater scale. Retain ADD with unchanged EPS forecasts and Target Price. The stock offers 10.8% upside including 5.5% yield.

Buying Into Defensive, Cash-yielding Assets

SPH announced it has purchased a portfolio of purpose-built student accommodation (PBSA) from Unite Group, UK’s largest manager and developer of PBSA.

• The cash onsideration of S$321m (£180m) is close to its market value as at 31 Jul 2018, based on a Cushman & Wakefield valuation report, and reflects 6.3% net initial yield

Adjustment Mechanisms Overlooked; 6% EPS Accretion

The sale and purchase agreement also includes

1. a rent guarantee capped at S$4.4m (£2.5m) for any potential shortfall as at 30 Nov 2018, and
2. rental income adjustment of up to S$24.4m (£13.7m) on the cash consideration if the actual income falls below 95% of the estimated income for these assets.

SPH estimates the acquisition will add about S$12m (c.6%) to its FY17 core earnings. Net gearing could increase from 0.33x (as at end-3Q18) to 0.41x, based on our forecasts.

Diversified PBSA Exposure

The acquired PBSA portfolio of 3,436 beds are located in 14 buildings (10 freehold, four leasehold) across six UK towns/cities, with the biggest exposure in Plymouth (32% of beds). According to JLL’s 2017 report, Plymouth faces chronic undersupply with only 20- 30% of PBSA relative to its student number.

We expect a weaker Sterling and Article 4 enforcement (council restriction on change of use from homes to houses in multiple occupation, HMO) to underpin demand for UK overseas study and PBSA, respectively.

Leveraging on Professional Management

SPH has also entered into an operating management agreement for these assets with Victoria Hall, a UK professional operator of student accommodation with 21 years of sector experience.

Post its restructuring, and new hires and appointments of executives, we believe SPH’s management team has been reinforced and that the rejuvenation of its media business remains a priority for the group, even with its overseas expansion.

More Acquisitions to Come, Maintain ADD

• We maintain our FY19-20F forecasts for now, as we have earlier factored in S$500m asset acquisition by the end of FY19F, with expected profit contribution of S$10.4m (including interest expenses). We expect SPH to make further acquisitions to build greater scale in the UK.
• We maintain our ADD call, with our SOP-based Target Price of S$2.88 and 5.5% forecasted dividend yield.
• Downside risks to our Add call are poor ad revenue and weak overseas execution.

Source: CGS-CIMB Research - 12 Sep 2018