• Singapore Press Holdings (SPH) acquired three new student accommodation assets which add 1,243 beds to its portfolio and bring total AUM to above S$600m. Recent acquisitions appear more selective, with SPH electing for investments in cities with upper-mid-tier universities, which have more dependable demand. Inorganic expansion is gaining momentum as the group works towards building up a defensive portfolio.
• Maintain BUY with a revised SOTP-based target price of $2.86.

What’s New

Acquired three student accommodation assets for £134m (S$237m).

• Singapore Press Holdings (SPH, SGX:T39) has acquired three purpose-built student accommodation (PBSA) assets across three cities in the UK, adding 1,243 beds. This brings SPH’s total portfolio to over 5,000 beds. (See SPH's announcement dated 16-Apr-2019.)
• The purchases were made from varied funds - Habitus Holdings, Privilege Holdings, Privilege Southampton Holdings, AIGGRE Europe Real Estate Fund I.

Located in cities with upper-mid-tier universities.

• The assets are located in Southampton, Sheffield and Leeds, which have sizeable full-time student populations and enjoy strong occupancy rates in excess of 90%. The accommodations seek to serve upper-mid-tier universities (part of the Russell Group) within their respective cities and can be expected to have sizeable and sustained demand.
• According to the Times Higher Education ranking, the University of Southampton, University of Sheffield and University of Leeds are ranked 15th, 12th and 21st in the UK respectively. The portfolio of assets acquired comes with a rental guarantee that covers the 2018/19 and 2019/20 academic years (FY19-20).

Net initial yield of 5.2-5.5% for FY20; slightly above average rental rate growth.

• The bulk of the acquisitions are in regions which have slightly higher-than-average rental rate increases, namely Leeds and Southampton, which have exhibited rental growth rates of 2.7- 6.5% in 2018, according to Cushman and Wakefield Accommodation Tracker.
• The Southampton asset, accounting for 42% of the acquired beds, also seems to be capitalising on a low supply pool in the region, with the developmental pipeline of beds forming only 11% of current supply.

Scaling up.

• With an enlarged platform, SPH is poised to extract greater economies of scale, with a dedicated team of 5 in the UK and 8 in Singapore overseeing the PBSA portfolio together with more than 100 employees managing the assets.
• SPH’s PBSA AUM is now in excess of S$600m establishing SPH as a leading player in the UK.

Stock Impact

Acquisition builds upon defensive assets.

• SPH’s cash-yielding acquisitions will enhance recurring income for the group, now more so with its sizeable asset portfolio.
• Overall, the recent acquisitions are trending towards selective regions where the corresponding universities are dependable upper-mid-tier institutions with robust demand.
• On a pro-forma basis, the acquisition adds an estimated S$7.4m to SPH’s net earnings.

Moderating earnings decline from media business.

• The PBSA acquisitions serve to arrest the earnings decline arising from the media business, which have fallen by S$21m over 2017-18. SPH’s current acquisitions in PBSA amount to slightly above S$20m in net profits and growth may be expected upon further acquisitions.

Earnings Revision / Risk

Earnings forecasts raised slightly, factoring in interest expense.

• Assuming similar debt levels of 60% for the acquisition, this would raise our net profit estimates slightly for FY19 and FY20 to S$210m (+1%) and S$204m (+2%) respectively.

Valuation / Recommendation

• Maintain BUY with a revised SOTP-based target price of S$2.86, as we factor in a higher value for UK PBSA.
• We remain positive on the group’s transitional strategy into a defensive portfolio, which is largely under-appreciated.

Share Price Catalyst

• Acquisition of student accommodation assets.

Source: UOB Kay Hian Research - 18 Apr 2019