• SPH REIT's 3QFY20 DPU of 0.5 Scts came in below expectations. We cut FY20-22F DPU by 3-29%, to reflect more rental waivers, weaker rent, and lower payout.
• 3Q occupancy was high with shopper traffic recovering gradually. We expect a more challenging lease renewal process in FY21F.
• Reiterate ADD with a lower Target Price of S$1.10.
• We believe the market has priced in Covid-19 impact. SPH REIT is trading at 0.82x P/BV, below -2 s.d. of 5-year mean.

SPH REIT's 3QFY20 Business Update

• SPH REIT (SGX:SK6U) declared 0.5 Scts DPU (-64% y-o-y; +67% q-o-q) in 3QFY20, bringing 9MFY20 DPU to 2.18 Scts (- 47.3% y-o-y), representing 50% of our FY20F DPU.
• Weak income due to rental waivers aside, we also believe that SPH REIT has retained some income for further rental assistance in addition to the mandatory rental waiver imposed by the government. We cut our FY20-22F DPU by 3-29%, to reflect an additional 0.3-month rental waiver for FY20F, lower dividend payout and weaker rental reversion.

Strong Renewals for FY20; Expect Longer Renewal Process in FY21

• Despite the tough operating environment, SPH REIT managed to maintain a high occupancy rate of 98.8% in 3Q.
• In Singapore, Paragon has only 1% of lease (down from 3% last quarter) by GRI due to be renewed in FY20 while The Clementi Mall’s leases due in FY20 have all been renewed, thanks to its advance negotiation policy. Recall that as at FY19, The Clementi Mall had 55% of leases due in FY20. The fast renewal rate is a testament of the quality of The Clementi Mall.
• In Australia, SPH REIT renewed some leases with Figtree Grove’s expiring leases declining from 13% to 8% by GRI and Marion’s from 30% to 28%. We believe renewals in FY21F would be more challenging given the current environment.

Visitor Traffic Declined But Recovering Gradually

• Paragon and The Clementi Mall’s traffic declined by 59% and 53% y-o-y in 3QFY20, respectively, due to the closure of the malls (except for essential services) during the circuit breaker. Its Australia malls did better in terms of traffic as there were no mall closures. Figtree’s traffic was flat y-o-y in 3QFY20 while Marion saw traffic decrease by 37.5% y-o-y. We understand that all tenants have commenced trading.
• Since the Phase 2 economy reopening, The Clementi Mall has seen substantial improvement in traffic but still lower than pre-Covid-19 levels. The recovery of Paragon is more gradual with traffic still 40-50% lower than pre-Covid-19 levels. Figtree and Marion saw much better recovery with traffic recovering to pre-Covid 19 levels. Given this, the management is less concerned about the impact of mandatory SME assistance imposed by the Australian government. We understand that pre-termination requests are minimal so far.

Maintain ADD

• We maintain ADD on SPH REIT with a lower DDM-based Target Price of S$1.10.
• SPH REIT is trading at 0.82x P/BV, lower than -2 s.d. of 5-year mean which may have priced in the downside risks from Covid-19. We continue to like its niche and quality assets.
• Upside/downside risks include better/worse rental reversions and more rental waivers.

Source: CGS-CIMB Research - 2 Jul 2020