Brokers’ take: DBS upgrades Paragon Reit to ‘buy’ as China’s borders reopen

DBS Group Research has upgraded Paragon Real Estate Investment Trust : SK6U 0% (Reit) from “hold” to “buy” as it expects the Reit to be a prime beneficiary of China’s reopening, as well as a key proxy to Orchard Road’s recovery. 

Its target price on the Reit has also been raised to S$1.10 from S$0.96 to reflect higher rental reversion assumptions for FY2023 to FY2025, as well as an estimated moderation in net property income margin in FY2023 to FY2024.

In a report on Thursday (Jan 26), DBS analysts said Paragon Reit currently trades at an “attractive” one time price-to-book value ratio, and has a projected FY2023 yield of 5.6 per cent. 

The research house expects the return of Chinese travellers to bring about an increase of more than one million shopper footfall at Paragon Mall, where higher sales efficiency is also anticipated in 2023 due to a rise in luxury spending. 

Coupled with anticipated positive reversions and a recovery of tenant sales to above pre-Covid levels, DBS foresees a boost to Paragon Reit’s topline revenue as tourist arrivals in Singapore see “full-year traction” this year. 

“We believe that Paragon Mall ticks all the boxes for a recovery in tourist arrivals, specifically Chinese travellers and medical tourists,” said the analysts. 

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They further expect this asset to anchor Paragon Reit’s status as a reopening play, given that it gives the Reit portfolio 65 per cent exposure, by asset valuation, to Orchard retail.  

Further developments on China’s reopening are projected to be a key catalyst for the Reit, along with the expected decline of electricity charges. 

DBS also highlighted the possibility of a takeover, which could unlock value, given that the ultimate shareholders of Paragon Reit’s new sponsor Cuscaden Peak are sponsors of other listed Reits.

Cuscaden Peak as a sponsor could also offer the Reit opportunities to acquire stakes in Seletar Mall and Woodleigh Mall, which the DBS analysts highlighted as “potential injections into Paragon Reit in the medium term at opportune times”. 

Units of Paragon Reit were trading 0.5 per cent or S$0.005 higher at S$0.98 as at 4.30 pm on Thursday.