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DBS downgrades Sabana REIT to 'hold' on valuations

Felicia Tan
·3-min read

The brokerage has kept its target price on the REIT at 48 cents.

DBS Group Research has downgraded its recommendation on Sabana REIT from “buy” to “hold” after the REIT delivered a “strong set” of results for the FY2021 ended Dec 31, 2021, on Jan 20.

The REIT’s distribution per unit (DPU) for the FY2021 increased 10.5% y-o-y to 3.05 cents, in part due to the lower base in FY2020.

During the year, Sabana REIT also reported an improved portfolio occupancy, which was mainly attributable to its multi-tenanted buildings.

In addition, the REIT saw 10.5% positive rental reversions in the FY2021, with the main contributor being the rejuvenated New Tech Park.

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That said, the downgrade came about based on valuations, with a weighted average cost of capital (WACC) of 7.0%.

The REIT’s target price remains unchanged at 48 cents, representing an implied FY2022 yield of 7.0%, say analysts Dale Lai and Derek Tan.

In the FY2022, Lai and Tan estimate that the completion of its new lifestyle mall within New Tech Park, NTP+, is projected to add $3.5 million to the REIT’s revenue.

The new mall is also expected to boost occupancies and rental reversions for the REIT. The completion of NTP+ has also led the analysts to forecast a DPU compound annual growth rate (CAGR) of 7% over the next two years.

With the completion of five asset enhancement initiatives (AEIs) in the past year that led to portfolio revaluation gains and earnings growth, the REIT indicated that it will continue to focus its efforts on more AEIs.

“With AEIs at 1 Tuas Avenue 4 currently on the cards, we believe that more clarity on such plans and firm precommitments for the property will drive earnings upside,” write Lai and Tan.

The REIT, in its results statement, revealed that it had exciting growth plans ahead, although the analysts at DBS feel they “require more clarity” on the REIT’s plans to achieve their target assets under management (AUM).

“Although Sabana REIT’s capital management fundamentals are conducive for acquisitions, stiff competition for quality industrial and logistics assets could pose a hurdle,” they write in their Jan 21 report.

“As such, we hope to see more clarity on Sabana REIT’s ability to acquire accretively in the coming years to achieve their targeted $1.0 billion AUM,” they add.

DBS is the only brokerage covering the counter, with the analysts assuming an “uplift in earnings in the next two years driven by the recent completion of NTP+ and other AEIs”.

Downside risks to the counter include the resurgence of Covid-19 cases in Singapore, which could lead to another round of rental rebates for Covid-19. The move, add the analysts, could affect the REIT’s DPU as evidenced in the 1HFY2020.

As at 1.57pm, units in Sabana REIT are trading flat at 45.5 cents, with an FY2022 P/NAV of 0.9 times and DPU yield of 7.5%.

Photo: Sabana REIT

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