• SPH REIT's 1HFY20 NPI up 18% y-o-y but 1HFY20 DPU declined 39% y-o-y to retain cash for the uncertainties ahead.
• Balance sheet is strong enough to sail through tough times.
• Reiterate ADD. The stock is trading at 0.7x P/BV.

Strong Results But Retained Cash Due to Uncertainties Ahead

• SPH REIT (SGX:SK6U)’s 1HFY20 revenue grew S$21.5m (+19.2% y-o-y) while NPI increased 18.1%. The strong results were mainly driven by the acquisitions of Westfield Marion and Figtree Grove shopping Centre; the exercises were completed in Dec 2019 and Dec 2018, respectively. Excluding the acquisition effects, revenue improved 3.6% y-o-y while NPI increased 4.2%. Paragon, Clementi Mall and Rail Mall rental reversion improved 5.6%, 8.2% and 14.5%, respectively, leading to overall Singapore rental reversion of +6.7%.
• SPH REIT, however, only declared 3 Scts DPU in 2Q (-79% y-o-y) due to the uncertainties ahead. 1HFY20 DPU hence declined by 39% y-o-y to 1.68 Scts (31% of our full-year forecast).

Giving Up to 2 Months of Rental Rebates to Tenants

• SPH REIT has renewed most of its leases (Paragon 2% remaining, Clementi 10%, Rail Mall 15%) in Singapore due in FY20. In Australia, Figtree Grove has 13% of leases to be renewed in FY20 while Westfield Marion has 30% of the leases remaining. We believe lease renewals in FY20 will be challenging due to Covid-19.
• We understand that Australia tenants are also asking for rental rebates. In Feb and Mar 2020, SPH REIT dished out S$4.6m rental rebates (not recognised in 2QFY20 results) to the affected tenants. In Apr and May, SPH REIT will be giving out up to 50% of base rent to the most affected tenants. This is in addition to the full property tax rebates that will be passed on fully to tenants.
• Effectively, the most affected tenants will have base rents waived for up to two months.

No Concerns Over Refinancing

• SPH REIT has S$280m (21.5% of total debt) debt due in FY20. We believe refinancing is not an issue given that The Clementi Mall and The Rail Mall are unencumbered. Management indicated that the REIT still has room before hitting the debt covenants.
• SPH REIT's 1HFY20 gearing was at 29.3%, one of the lowest geared SREITs.

Reiterate ADD

• We reduce FY20-21F DPU by 2-26%, mainly factoring in 3 months of rental rebate to 70% of tenants, zero variable income from 70% of the tenants for the remainder of 2020 (9 months impact), 50% reduction in carpark income and weaker A$ and lower dividend payout ratio of 90%. Our DDM-based Target Price is reduced to S$1.12 accordingly.
• Despite the weak outlook, we reiterate ADD; the stock is trading at 0.7x P/BV and we believe the market has priced in the potential income downside.
• Upside/ downside risks include worse-than-expected/ better-than-expected impact from Covid-19.

Source: CGS-CIMB Research - 1 Apr 2020