Wednesday 23 December 2020

SPH REIT Still Undervalued by 30% from Peak- Fear of new COVID-19 Outbreaks on Retail Landscape

SPH REIT and other retail REITs are still reeling from the mall closures and rental waivers during the worst season of the pandemic in Singapore from April'20 to May'20. Since 2017, the market valuation of SPH REIT on SGX has always been hovering between S$1.00 to S$1.10 per unit. The current unit price of S$0.840 per unit represents a 30% potential capital upside that still has not priced in much optimism on recovery but still sinking in extreme pessissim by the market. Fear is driving many investors away from SPH REIT citing potential future severe outbreak of COVID like the European countries, Korea & Japan and the end of retail at shopping mall as e-commerce (driven by e-marketplaces such as Amazon, Shopee, Qoo10 etc) continues to grow rapidly. This actually represents the best opportunity to continue scoping up units in SPH REIT while most folks are still fearful in order to reap the reward by waiting for the eventual retail recovery over the next 3-5 years. 

1. COVID Vaccines will be rolled out in early January 2021 in Singapore- First batch of vaccines received this week already. 
Singapore is the first country in Asia to receive the COVID Vaccine. As more and more vaccines became available to the general population, this allows for herd immunity (70% to 80% of population target) to be achieved without substantial fatality and thus reduces the probability of another "circuit breaker". 

The current "mutant" and more infectious UK COVID strain should not be a grave concern as the vaccines will be able to offer protection for it as per the leading CEOs of the respective vaccine developers.

2. E-commerce will end retail malls and their relevancy in Singapore?
I disagree with such belief. The retail scene is very different in Singapore compared to other countries such as European countries or the United States. Unlike in Europe and the US where cities were built around outdoor commercial streets and plazas, shopping malls in Singapore form an integral part of the urban landscape and consistently achieve high footfall especially at suburban neighborhood areas. 

Singapore is a land-scarce nation where the government controls the supply of commercial space through long-term planning policies and government land sales. This thus limit the supply of shopping mall relative to the residents living in a certain district.

In addition, shopping malls in Singapore have been adapting to shifting trends well by including more F&B outlets & educational centers into their tenant mix. Many malls are also experimenting with new retail stall concept. For example at Capitaland Funan shopping mall, the tenant Courts opened its first IoT-themed store, which retails the latest smart home, AI and voice-control technology from leading brands, incorporates interactive in-store experiential concepts and robotics. Swiss sewing machine brand Bernina’s flagship store at Funan offers a new lifestyle concept that includes themed sewing workshops, machine rental service as well as gift personalisation service.

3. SPH REIT maintained a strong balance sheet and operating financial metrics

  • One off non-recurring (touch wood-unless there is another lockdown) rental waiver of S$39.9Mil given to tenants in Singapore and Australia thus leaving FY2020 Net Property Income ("NPI") of S$182Mil. Non-recurring rental waiver thus comprises 21.9% of NPI.
  • As at year end 31 August 2020, occupancy rate remains high at 97.7%
  • As at 31 August 2020, SPH REIT’s gearing was stable at 30.5% while its debt maturities were well-staggered with no refinancing due till June 2021.
  • Net asset value per unit as at 31 August 2020 was S$0.91 per unit a decline of only 4.2%.

4. Most of the shopping malls under SPH REIT (with the exception of Paragon) has recovered to near pre-covid levels and Phase 3 launch on 28 Dec 2020 to further boost traffic.

4.1 Suburban local shopping mall (Clementi Mall etc) and Australian Shopping Malls
On 19 June 2020, the Singapore Government relaxed the COVID control measures and most businesses were allowed to resume trading. Progressively, businesses have started to show signs of recovery. With Phase 3 to commence soon on 28 December 2020, it is anticipated that dining capacity and overall shopper traffic will increase, which will in turn will benefit SPH REIT tenants’ businesses.

In the initial months when COVID-19 hit Australia, tenant sales declined in SPH REIT Australian malls in the continent. Unlike Singapore, in the cities where SPH REIT assets are located, there were no lockdowns, but there was some form of restricted trading, in particular, those with “touch points” such as cinemas and massage services. Since May 2020, both of SPH REIT’s assets in Australia started to show signs of recovery and from July 2020 onwards, tenant sales are almost back at pre-COVID-19 levels.

4.2 Paragon shopping mall in Orchard Road
Paragon’s location on Orchard Road appeals to locals as well as tourists. Its well-established premier upscale positioning continues to attract the target market from the local community. However, with the border restrictions imposed since February 2020, international tourist arrivals declined 97%. 

Without the tourists’ consumption along Orchard Road, which is the most visited free access attraction in Singapore, Paragon’s tenant sales were inevitably impacted. Paragon’s tourist visitation closely mirrors the Singapore Tourism Board’s report that about 30% of Orchard Road consumption is from tourists. 

The Medical tower of 90 specialist were also affected by the border restriction on the Medical Tourism industry and also circuit breaker which only allows essential medical procedures. However, Singapore is expected to open up gradually in 2021 to international visitors once vaccination rate improves for the general population. Personally, I expect Paragon businesses to recover close to pre-COVID levels in the 2nd half of 2022.   

5. High forward dividend yield based on $0.840 per unit price
Using 2019 quarterly dividend average of S$0.014 per unit as future operations norm, annual dividend expected is S$0.056. At current price of S$0.84, this represented a dividend yield of 6.7%-7.0% from good quality assets such as Paragon and future M&A pipeline of Seletar Mall and upcoming Woodleigh shopping mall for inorganic growth. Investors who went in now will have another capital upside potential of at least 30%. The world will not be defeated by COVID and medical advances with vaccines and better treatment will definitely lead to an eventual economic recovery. 
The Seletar Mall

The COVID-induced recession is one of the worst that the world has ever seen with economies coming to a virtual standstill. However, it also presented an opportunity to purchase retail assets at such a huge discount to their potential valuation. Buying into SPH REIT now is like buying into an Orchard Road prime property at 30% discount off. Investors who stay the course of their investment and who dare to make additional purchases this year and even early next year will see substantial returns on their retail REIT investments over the next 3-5 years. 

(P.S: On the subject of valuation, there are many variables and factors. For skeptical folks whose narrow mindset "understanding" of valuation concept is based on current known conditions only and not forward looking into the future and treat the REIT as a non-going concern and undergoing immediate liquidation, then the valuation will approximate to the last known NAV of S$0.91 per unit based on fair value of its investment properties on again known prevailing market conditions as at financial year end. A more logical valuation method would be to view the present value of net future inflow of economic benefits isn't it?)

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