SPH REIT 3Q19 in Line, Prefer FCT (BUY, Target Price SGD2.60)

• SPH REIT (SGX:SK6U)'s 3Q19 DPU was in line with consensus and our estimate, up 1.5% y-o-y to SGD1.39cts, bringing 9M19 to 73% of full-year estimate.
• Looking ahead, DPUs will be supported by contributions from earlier deals and rental recovery at Paragon.
• We are selective on retail REITs as we expect larger-destination malls and suburban properties to do better. Investors need patience given limited visibility on SPH (SGX:T39)’s long-discussed potential Seletar Mall deal.
• SPH REIT’s AUM has expanded by 6% due to its first overseas asset, but trails its peers CapitaLand Mall Trust (SGX:C38U) at +12% and Frasers Centrepoint Trust (SGX:J69U) at +16% in the past 12 months. Reiterate HOLD with DDM-based Target Price of SGD1.05 (COE 6.8%, LTG 1.5%).
• We like Frasers Centrepoint Trust (BUY, Target Price SGD2.60, see report: Frasers Centrepoint Trust - Deepening Suburban Reach) for its stronger 6.0% 3- year DPU CAGR.

DPU Improvement From Deals and Paragon

• SPH REIT's revenue and NPI rose 127% y-o-y and 142% y-o-y in 3Q19, mainly due to acquisitions – Rail Mall (completed on 28 Jun 2018) and the 85% interest in Figtree Grove (on 21 Dec 2018). Its portfolio occupancy was stable at 990%. Meanwhile overall tenant driven by a 44% y-o-y improvement in shopper assets in Singapore in 9M19, up 1H19.
• Portfolio rental Singapore was strong at +84%, led by Paragon at +86% with 81 leases contributing 214% of its NLA renewed. This supported a 26% y-o-y and 3.5% y-o-y growth in revenue and NPI, while reversions at Clementi Mall were at +5.8% and Rail Mall at +9.1%.
• We forecast rents to rise by 35% in FY19-20E at Paragon given tight Orchard Road supply to support further positive rental reversions at Paragon. However, sales growth outlook for its tenants are capped by falling tourism shopping receipts.

Further Acquisition-led Growth Still Elusive

• Its aggregate leverage remained steady at 30.1% as of end-May 2019, while AUM has risen by 5.9% YTD following its deals. Investors are likely awaiting more sizeable acquisition growth opportunities given an almost SGD1b in debt headroom.
• Seletar Mall remains its primary potential sponsored deal in Singapore and could add 7-10% to FY19-20 DPU, assuming a fully debt-funded deal.

Source: Maybank Kim Eng Research - 12 Jul 2019