• As the largest listed mall in Orchard, SPH REIT (SGX:SK6U)’s Paragon is a beneficiary of easing COVID-19 restrictions and gradual reopening of the country’s economy.
• It is a potential candidate for Nareit Inclusion. It has strong balance sheet to support potential acceleration in inorganic growth.
• Reiterate ADD rating on SPH REIT, with S$1.04 target price. SPH REIT is a laggard among the retail REITs.

Reiterate ADD on SPH REIT at DDM-based Target Price of S$1.04

• Though SPH REIT's share price recovery has lagged its peers in recent months, we anticipate the following upcoming events to catalyse a share price outperformance:
  1. potential inclusion into FTSE EPRA Nareit Developed Asia Index come Sep 21,
  2. stronger performance from Paragon as Singapore economy reopens, and
  3. potential acceleration of inorganic growth, given its healthy balance sheet.
• SPH REIT is trading at ~6% DPU yield, below its 5-year mean of 5.3%, while its peers’ DPU yields have generally recovered to their respective 5-year means. We tweak SPH REIT's FY21-23F DPU forecast down 0.6-2% to factor in 2 weeks of mandated rental rebates and lower fees paid in units.
• Downside risks: retention of income, and weaker-than-expect dividend payout ratio and rental reversion.

The Largest Listed Beneficiary of Economic Reopening in Orchard

• Paragon is a beneficiary of easing COVID-19 planned for Westfield Marion and Figree Grove in Australia; we expect that to boost the assets’ rental income upon completion, in the medium term.

Low Liquidity May No Longer be a Concern in the Future

• Low liquidity is a usual concern for SPH REIT but this should ease in the near Asia Index come Sep 21. In addition, should the privatisation of SPH (SGX:T39) materialise, SPH REIT’s free float will be significantly enhanced from ~30% to > 75%.
• With Keppel REIT (SGX:K71U) and SPH REIT both under Keppel Corporation (SGX:BN4), we also do not rule out the possibility of the two REITs being merged; we see this as a positive from operation and valuation perspectives.

Strong Balance Sheet to Support Inorganic Growth

• SPH REIT has one of the lowest gearings (30.4% as at 1HFY21) among the S-REITs, giving it ample from Keppel Corporation which now owns several retail assets in Singapore and overseas.

• SPH REIT is also open to acquire alternative assets; this increases its acquisition opportunities and strengthens its inorganic growth potential. We believe medical suites could be an option. Continue to read the 17 pages report attached below for complete analysis on SPH REIT.

Source: CGS-CIMB Research - 26 Aug 2021