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Broker's take: Maybank Kim Eng still positive on S-Reits

MAYBANK Kim Eng remains positive on the outlook of Singapore real estate investment trusts (S-Reits), despite unit prices falling by around 24 per cent since February, while the broad market trades at 10-year lows.

S-Reits, which as a whole are trading at valuations above their historical averages, have benefited from compressed yields with some of the best-performing property trusts seeing reratings due to accretive acquisitions and inclusion into sector indices.

In a report on Tuesday, Maybank Kim Eng analyst Chua Su Tye said: "Valuations, especially for many of the more liquid large-cap names, are at premiums as measured against their historical trading dividend yields and price to net asset value (P/NAV)."

That said, he pointed out that the higher valuations are "justified" due to higher overseas freehold asset mix and longer weighted average lease expiries (WALEs), which could result in a higher distribution per unit (DPU) in the future.

With expectations of a "lower for longer" interest rate cycle, he added that valuations were not excessive.

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Furthermore, there could be increases in DPUs for unitholders. 

Following the Fed’s surprise 100 basis-point cut on March 15, Maybank now expects that the lower borrowing costs could result in DPUs increasing by up to 4 per cent.

"S-Reits’ balance sheets are strong, as they exercised discretion against interest rate variability with high fixed debt ratios (which averaged 77.9 per cent as of end-December 2019) while average leverage was 35.4 per cent," Mr Chua said.

With gearing below the Monetary Authority of Singapore's limit of 45 per cent and borrowing costs expected to decrease, acquisition growth is also being supported.

Given the challenging outlook due to the economic strain brought about by the Covid-19 outbreak, Maybank Kim Eng has a preference for industrial Reits, as they "maintain growth during the current recessionary cycle from their longer WALEs", which are backed by rising overseas assets.

The brokerage also finds valuations for CapitaLand Mall Trust (CMT) "compelling" when compared to its historical dividend yields and P/NAV.

Meanwhile, SPH Reit and Cache Logistics Trust are also trading at attractive valuations.

Maybank Kim Eng currently has a "buy" call with a price target of S$2.70 on CMT. Meanwhile, the brokerage has a "buy" recommendation on SPH Reit with a target price of S$1.15, and  a "buy" call with a target price of S$0.80 for Cache.

As at 3.45pm, CMT units were S$0.05 or 2.5 per cent down at S$1.95; SPH Reit units were S$0.05 or 5.8 per cent lower at S$0.82 and Cache units were S$0.03 or 5.8 per cent down at 48.5 cents.

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