Broker's take: DBS upgrades SPH Reit to 'hold', sees light at end of tunnel

DBS Group Research on Friday upgraded SPH Reit to "hold" from "fully valued" and raised its target price to S$0.80 from S$0.70.

Units of SPH Reit were trading at 84 Singapore cents as at 1pm, up 1.5 cents or 1.8 per cent.

Analyst Dale Lai upgraded the stock as the real estate investment trust (Reit) is currently trading at its trough valuation, with an estimated price to net asset value ratio of about 0.86.

He raised SPH Reit's target price to reflect the resumption of rental collections in the coming weeks as malls prepare to reopen in July.

"As the worst of the Covid-19 pandemic is past us, we can see the light at the end of the tunnel with the gradual easing of the 'circuit-breaker' measures," he wrote.

Mr Lai added that SPH Reit's distribution per unit (DPU) cut may have come as a shock to investors, but could now "become the upside surprise" given the nation's recently proposed rental waiver Bill.

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The Reit had cut its DPU by 79 per cent to 0.3 Singapore cent for the second quarter, with the retained income used to offset tenant rentals during the "circuit breaker".

SPH Reit committed up to 2.3 months of rental relief to selected tenants - the most generous among retail landlords.

Under the proposed Bill, landlords could potentially have to give tenants up to two months of rental relief, Mr Lai said.

The proposed Bill was announced on Tuesday alongside the Fortitude Budget, with Deputy Prime Minister and Finance Minister Heng Swee Keat announcing that landlords must grant a rental waiver to small and medium-sized enterprise (SME) tenants that have suffered a significant revenue drop in the past few months.

Eligible SME tenants in commercial properties will receive four months of rental relief, shared equally between the government and landlords, Mr Heng had said.

However, Mr Lai said it is "unlikely" that SPH Reit would have to provide more rebates, or make further provisions, given the already generous rebates given to its tenants.

"We see limited downside risks (caused by the proposed Bill) to SPH Reit's earnings forecasts. Its prudence in making provisions for tenant rental relief should provide some buffer to revenues for the rest of FY20," he wrote.

Mr Lai noted that SPH Reit's Paragon mall, which is located on Orchard Road, would continue facing weakness in the near term, as tourist arrivals and luxury retail remain impacted by the Covid-19 pandemic and impending economic slowdown.