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Maintain NEUTRAL and DCF-based SGD2.65 Target Price, 5% downside.
We remain confident of COMFORTDELGRO (SGX:C52)’s earnings growth, aided by contributions from recent acquisitions, and its public transport unit’s growth. Any reduction in Singapore rail losses amidst higher transport fares or government grants received could lift earnings and our Target Price.
EC WORLD REIT (SGX:BWCU) ASCOTT RESIDENCE TRUST (SGX:A68U) CAPITALAND RETAIL CHINA TRUST (SGX:AU8U) DASIN RETAIL TRUST (SGX:CEDU)
Singapore REITs - Monthly Tracker (july 2019)
FTSE S-REIT index return gained 3.6% MTD and 22.0% YTD. Strongest gains were from the Healthcare sector (+3.9% YTD) and weakest showing at the Hospitality sector (-2.3% YTD).
Sector yield spread still below the -1 standard deviation (s.d.) level as at end-June, at 245bps, over the benchmark 10-year SGS (10YSGS) yield.
3-month SOR fell to 1.83% as at end-June.
Remain NEUTRAL on S-REITs sector. Sub-sector preferences: Office and Hospitality.
S-REIT yield spread declined 65bps YTD as at end-June. The S-REIT yield spread compressed to 245bps as at end-June, still below the -1 standard deviation (SD) level. The S-REIT dividend yield was 4.41% as at end-June. The 10YRSGS yiseld eased 9bps m-o-m, to end at 2.00% as at end-June.
3-month SOR fell m-o-m 22 bps to 1.83% as at end-June.
The Monetary Authority of Singapore (MAS) published a consultation paper on 3 July 2019 in consideration of raising the current leverage limit of 45% and removing the requirement for REITs to submit a notification to MAS to obtain a “Restricted Scheme” status when they make an offer of units to accredited and other investors. This will allow the REITs more flexibility in managing their capital structure and capitalising on opportunities. Possibility of using operational metrics such as the interest coverage ratio (ICR) to determine the maximum leverage allowed.
Retail sales (excluding motor vehicle sales) declined -2.9% y-o-y in May, on a seasonally adjusted basis, dragged down largely by the furniture & household equipment (-13.0%) and the computer & telecom equipment (-6.9%) sectors. The F&B index was up +2.30% y-o-y (seasonally adjusted) in June.
Grade A (Core CBD) office rents grew 1.3% q-o-q in 2Q19, slowing from 3.5% q-o-q in 1Q19 according to CBRE Research. Average annual supply of office space coming onto the market from 2019 to 2023 (0.8mn sqft) is 27% lower than the 10-year average supply of 1.1mn sqft and should help to support rents.
Leasing activity in the industrial sector mirrored the slowdown in the manufacturing sector. Google will take up c.33% of space in FRASERS COMMERCIAL TRUST (SGX:ND8U)'s Alexandra Technopark while MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) announced its largest redevelopment project, which will reposition their Kolam Ayer 2 Cluster from flatted factories to high-tech industrial assets.
Average RevPAR saw a minuscule improvement of 0.27% y-o-y in May, with higher average room rate (ARR) being partially offset by lower occupancy. The luxury and mid-tier segment recorded RevPAR growth of 3.0% and 2.9% respectively while the up-scale and economy segment ended in the red (-1.33% and -3.33% respectively).
Remain NEUTRAL on the S-REITs sector, with selective sub-sector preferences.
While the S-REIT yield spread is currently below the -1SD level since the global financial crisis, strong rental growth should offset any adverse effects from rising interest rates. Strong rally in prices due to the dovish stance communicated by the FED has resulted in the FTSE S-REIT index return gains of 22.0% YTD. See S-REITs share price performance.
Most of the upside from the lower interest rate stance have been priced in, with many REITs trading at rich valuations (+2 std dev P/NAV).
Top-down view (unchanged)
We like the Commercial and Hospitality sub-sectors due to tapering supply after the surge in supply in the prior two to three years. We are cautious on the Retail sub-sector as retail sales and shopper footfall both leave much to be desired.
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Tactical bottom-up view (unchanged)
REITs that can better weather through the rising interest rate environment would be those with:
Long weighted average debt to maturity; and
A high proportion of debt on fixed interest rates.
S-REITs Peer Comparison Table
Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/2019-07-22
SGX StockAnalyst ReportBUYMAINTAIN BUY0.870 SAME 0.870
Positive rental reversions ranging 4.4% to 27.5% above the average expiring rent. Outlook positive as leases expiring in 2019/20 are below current market rents.
2 AEIs, seven-year lease of 21 Collyer Quay to We Work and acquisition of Main Airport Centre in Frankfurt, Germany announced.
Maintain NEUTRAL, higher Target Price of S$2.18 reflects our downward revision of COE from 6.76% to 6.34% due to the lower interest rate environment, and incorporates higher revenues from AEIs, new shares from placement, and the proposed acquisition of MAC.
ASCOTT RESIDENCE TRUST (SGX:A68U) NETLINK NBN TRUST (SGX:CJLU) DBS GROUP HOLDINGS LTD (SGX:D05) SINGAPORE EXCHANGE LIMITED (SGX:S68) UNITED OVERSEAS BANK LTD (SGX:U11) CAPITALAND LIMITED (SGX:C31) COMFORTDELGRO CORPORATION LTD (SGX:C52) SINGTEL (SGX:Z74) APAC REALTY LIMITED (SGX:CLN) SHENG SIONG GROUP LTD (SGX:OV8)
Singapore 3Q19 Strategy - Too Hungry For Yield
STI was up 3.4% in 2Q19. It was a volatile quarter, with two positive months sandwiched between May’s major sell-down. The largest gainers were REITs and specific stocks such as SingTel (SGX:Z74) (recovery in regional associates) and Wilmar International (SGX:F34) (IPO plans in China).
Markets rallied on a reversal of the Fed’s interest-rate stance and hopes of a trade resolution. Trump doused all such optimism by raising tariffs on Chinese imports. This against a backdrop of already weak global growth.
REITs rallied in the quarter on market expectations that interest rates have peaked, globally. The Fed will be cutting interest rates while the ECB has signalled the restarting of quantitative easing. Central banks’ back-stop has returned.
Looking past 2019E, multiple levers of growth appear intact and Venture Corporation (SGX:V03) is a beneficiary of the US-China trade war, as around 85% of production is outside China. However, 2Q19 may miss amid customers’ product transitions, and a potential share price fall may provide an even more attractive entry.
History suggests the stock is well supported at long-term mean dividend yield of 5.3%, which implies SGD13.20 on FY19E basis. We await 2Q19 results to reassess our forecasts.
Maintain BUY and ROE-g/COE-g Target Price of SGD19.74 (based on 2.2x FY19E P/B).
We estimate a Chinese listing can potentially unlock as much as a 23% higher valuation for Wilmar International (SGX:F34) - consumer staple peers in China trade at an 80% PE premium. The group is likely to raise at least USD2.1bn to support new capacity in oilseeds and grains processing, according to its prospectus lodged with China’s securities regulator – CSRC.
If the Singapore ParentCo pays out an equivalent of half the raised amount as capex savings, the 2020E potential dividend yield could rise to 9% (vs. 2.7% now).
SATS LTD. (SGX:S58)' 1Q20 reported PATMI of SGD54.7m missed our and consensus estimates by c12-15%. That said, most of the factors responsible for the miss are temporary in our view and should mend in coming quarters, and underlying core PATMI of SGD58.5 was just a shade below our expectation accounting for c22% of FY20E.
While Singapore fell, Japan and ASEAN ex-SG associates/JVs grew better than expected.
Our BUY and DCF-based Target Price (WACC 6.8%; TGR 2%) of SGD6.10 are unchanged.