Tuesday, 11 April 2017

Stock Market Today:Opting to pay fees in partial cash a good move for this REIT

SINGAPORE :DBS is maintaining its buy call on SPH REIT with a higher target price of $1.04 after the REIT manager has elected to pay 40% of base management fees in 3Q17 in cash.

We factored in future fees payable in cash in our model. We believe this decision will be favourable to unitholders as the dilutive impact is now less," says analyst Derek Tan in a Tuesday report, who says investors are now looking at a dividend yield of at least close to 6% and upside potential of 6%.

Meanwhile, Tan believes this is an opportune time for SPH REIT to consider acquiring The Seletar Mall for $500 million from its sponsor, ideally within the next six months prior to the completion of The Seletar Mall's first renewal cycle at the end of 2017.

Following the acquisition, there could be a 3-4% lift in DPUs on the assumption of an optimal funding scenario which involves a partial equity fund raising of $200 million, says the analyst.

Post acquisition, gearing will increase slightly from 26% to 31% but still conservative compared to the peer average of 34%. But most importantly, the stock's liquidity should improve, which will be positive for stock prices.

With The Seletar Mall, we are positive that SPH REIT's portfolio will see stronger performance in the medium term, says Tan.SPH REIT will also derive a higher proportion of its income from necessity shopping, which adds to its resilience.

Despite c.3% drop in DPUs in the next few years, our TP for SPH REIT increases by 1% and DPU growth is strengthened and more sustainable, says Tan, Total potential return increases to 12.3% from 11.5%.Units of SPH REIT are up 1 cent at 99 cents.

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