SPH REIT (SGX: SK6U) Maintains Healthy Balance Sheet With Slow Recovery



SPH REIT (SGX: SK6U) slashed third-quarter DPU to 0.5¢, taking its 9M FY2020 payout to 2.18¢. It is currently trading at 6% yield based on the last traded share price of $0.86.


Key Highlights:


  • Distribution per unit (DPU) and Dividend Yield (6%)

  • Price to book ratio (0.77)

  • Gearing (30%)

  • Interest coverage ratio (4.4x)

  • Portfolio occupancy rate (98.8%)

  • Growth catalyst


Background of SPH REIT


SPH REIT mainly invests in retail assets in the Asia-Pacific region. Currently, it has a portfolio of five assets in Singapore (Paragon, The Clementi Mall and The Rail Mall) and Australia (85% stake in Figtree Grove Shopping Centre and 50% stake in Westfield Marion Shopping Centre).


SPH REIT’s sponsor and also main shareholder is the Singapore based media giant, Singapore Press Holdings Limited (SGX: T39).


1. Distribution per unit and dividend yield


In its latest quarterly result, SPH REIT slashed its DPU to 0.5 cents as compared to 1.39 cents in Q3 last year. The weak performance was due to the Covid-19 pandemic, which affects the retail sales in the past three months. The REIT also extended rental waivers to its eligible tenants.


Historically, the REIT has been paying very consistent but stagnant DPU over the years. It is currently trading at about 6% yield, which is higher than its historical average of 5.5%.


SPH REIT's DPU Trend


2. Price to book ratio


Over the past 6 years, SPH REIT has been trading at an average price to book ratio of 1.07. It is currently trading at huge discount ratio based on its price to book ratio of 0.77.


SPH REIT's Price to Book Ratio

3. Gearing


The REIT maintains a very healthy balance sheet with a low portfolio leverage of 30%. This gives the REIT a huge debt headroom of more than $1 billion based on 45% gearing ratio.


4. Interest coverage ratio


The REIT has an interest coverage ratio of 4.4 times, which is slightly above our preference of 4 times. Besides, the REIT's overall interest cost remained low at 2.79%. It has no debt maturity due until June 2021.


5. Portfolio occupancy rate


Portfolio occupancy remains at an almost full occupancy rate of 98.8%. Singapore properties maintained near full occupancies except for Rail Mall, which stayed at 92.2%. the management also warned that there could be a higher vacancy risk in the coming quarters against slow leasing activity.



6. Growth Catalyst and Covid-19 Impact


We have moved to Phase 2 of reopening since 19 Jun, which has allowed most of the F&B and retail businesses to resume. The suburban mall like The Clementi Mall has seen gradual increase in retail sales and footfall. However, its prime asset, Paragon is expected to encounter slower recovery due to the muted tourist activities.


The Australian government mandated that landlords to assist tenants by sharing financial risks and cash flow impact. SPH REIT has been working with its partners to roll out targeted assistance to its tenants.


Summary


SPH REIT has been delivering healthy balance sheet over the years. However, we expect the slowdown in economic activity could reduce the demand for retail space in the upcoming quarters, which will result in lower occupancy rates. Thus, we are slightly bearish on its DPU in the next few quarters.



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