Maybank Kim Eng stays positive on S-Reits, favours industrial Reits

Singapore

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 decade lows.

As a whole, S-Reits are trading at valuations above their historical averages and their yields compressed, with some of the best performing property trusts seeing re-ratings 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, Mr Chua pointed out that higher valuations are "justified" due to the 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.

Bearing in mind that expectations are for a "lower for longer" interest rate cycle, he added that valuations were not excessive given 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 also stand out as they are trading at historically low price levels.

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.

On Tuesday, CMT units closed S$0.10 or 5 per cent lower at S$1.90; SPH Reit units ended S$0.07 or 8.1 per cent lower at S$0.80 and Cache units finished S$0.035 or 6.8 per cent down at S$0.48.