Brokers' take: DBS downgrades Sabana Reit to 'hold' on valuations

DBS Group Research on Friday (Jan 21) downgraded Sabana Industrial Real Estate Investment Trust (Sabana Reit) M1GU : M1GU 0%to "hold" from "buy" based on valuations.

Sabana Reit's share price has risen more than 20 per cent in the past year as its portfolio earnings recovered from the height of the Covid-19 outbreak. Optimism over its portfolio rejuvenation has also taken shape, DBS said in a research note.

The research team has maintained its target price of S$0.48 on Sabana Reit, representing a potential upside of about 5.5 per cent to Sabana Reit's last trading price of S$0.455 as at 3.08 pm on Friday.

DBS expects the completion of NTP+ at 151 Lorong Chuan to deliver a boost to Sabana Reit's FY2022 earnings - adding about S$3.5 million to revenue and boosting occupancies and rental reversions.

Thus, the research team projects a distribution per unit compound annual growth rate of about 7 per cent over the next 2 years.

"At such levels, we believe that Sabana Reit is fairly priced and, therefore, have maintained our target price," DBS analysts Dale Lim and Derek Tan said.

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Sabana Reit's manager is also planning more asset enhancement initiatives (AEIs). It has identified 1 Tuas Avenue 4 as its next major AEI candidate to transform the property into a specialised logistics facility that offers cold storage.

Cold storage warehouses remain limited in the Tuas precinct and have the ability to potentially command better rents, the analysts said.

They are waiting for more clarity on these AEI plans to drive the next leg of Sabana Reit's earnings growth. As 1 Tuas Avenue 4 is currently vacant, any lease commitments and revenue would lead to "incremental upside to earnings", the analysts noted.

On Thursday, Donald Han, the chief executive of Sabana Reit's manager said the Reit is moving into the next phase of its growth strategy as it targets to increase its portfolio value to more than S$1 billion over the next 3 to 5 years.

Part of this strategy will see Sabana Reit continue to build on its AEIs, Han said in a media call following the release of Sabana Reit's FY2021 results on the same day.

Last year, Sabana Reit performed AEIs at 5 of its properties, which contributed to their respective valuations increasing by between 1.9 per cent and 11.3 per cent. Overall, Sabana Reit's total portfolio valuation rose 3.1 per cent year on year to S$866.2 million as at end-December 2021, from S$840.1 million a year ago.

READ MORE: Sabana Reit posts 31.4% drop in H2 2021 DPU to S$0.0157; seeks growth via AEIs, acquisitions