Target price Starts at SGD 0.94
Closing price August 30, 2013 SGD 0.96
Prime commercial paragon
Action: Neutral; highest exposure to prime Orchard retail
SPH REIT offers the highest exposure to the prime Orchard retail market amongst S-REITs, as the Paragon asset accounts for over 80% of initial portfolio value and is the primary driver of valuation.
The Paragon Mall has a solid operating track record, consistently achieving committed occupancy of 100% and a compounded annual growth of 7% in rents over the past 10 years. It appears average rent at Paragon is still competitive vs. ION Orchard and Wisma Atria. Coupled with limited new supply of prime retail space projected in FY13-14F, we believe there is potential reversion upside for leases expiring in FY14F. Medical suites/offices account for 32% of Paragon’s total NLA currently and its proximity to the Mt. Elizabeth Hospital has contributed to its popularity amongst healthcare providers.
Catalyst: Potential acquisition in the medium term
Upon completion of the Seletar Mall at end-2014F, we believe there is potential for SPH REIT to exercise the ROFR to acquire the asset, which could add c. 5% to distribution on our numbers, assuming entry yield of 5.5% and 75% debt financing at a WACC of 3.6%.
Valuation: Initiate at Neutral with SGD0.94 TP
Our TP of SGD0.94 is based on the average of 1) our NAV estimate of SGD0.95 and 2) ascribed FY14F yield of 5.5%. Our TP implies a potential total return of 3.3% (potential downside of 2.1% + FY14F yield of 5.4%). Considering the flattish distribution in the near term, we believe the stock is fairly priced for now. We initiate coverage with a Neutral rating.
Publish date: 04/09/13