SPH REIT: “Overwhelming” Institutional Demand, Slight Upside Potential

SPH Reit launched its IPO at the top end of the book-building range of $0.90 and the placement tranche was a whopping 42x and I have to admit I am surprised by this ‘overwhelming’ demand which unfortunately depressed the yield and potential upside.
Issue details
Placement tranche: 224.902m Units
Public tranche: 83.982m Units
Cornerstone: 251m Units
Application closing date: 22 July 2013 12pm
Listing date: 24 July 2013 2pm
First distribution: On or before 27 Feb 2014

PARAGON Forecast yield At $0.90, SPH Reit will distribute a forecasted annualized yield of 5.58% for 2H FY2013 and 5.79% for FY2014

Forecast yield

What I like about the REIT
  • Premier upscale retail mall at the heart of Orchard Road
  • SPH continue to hold 70%, which creates strong alignment of interest
  • Fresh 99 year leasehold on Paragon and close to 99 years on Clementi Mall
  • Exposure to the healthcare services sector which is resilient (via Paragon)
  • Right of First Refusal on SPH’s properties.
  • Leverage of 27.3%
What I don’t really like
  • Paid a slight premium to NAV
  • Artificial income support by SPH to Clementi Mal l
Peer valuation (17 Jul 2013)
  • Starhill Global is trading around yield of 5.67% and a price to book of 0.88x (leverage 30%)
  • Capitamall is trading around 5.03% and a price to book of 1.21x (leverage 35%)
  • Frasers CT is trading around 5.6% and a price to book of 1.24x (leverage 30%)
  • Suntec is trading around 5.76% and price to book of 0.77x (leverage 36%)

Mr IPO’s views
Looking at the peers’ valuation, the yield seemed to be between 5% (Capitamall) to 5.7% (Suntec) and between 0.77x (Suntec) to 1.24x (Capitamall) in terms of price-to-book. I will not use the price to book as the benchmark has proved to be too wide ranging.

Assuming a yield of between 5% to 5.7%, the trading range will be between 88c and 99c.

Don’t expect any fireworks as the REIT is priced fairly. The “overwhelming” institutional demand and “over-allotment” stablisation will probably lend support to SPH with slight upside potential.

I will give it a 1 chilli rating. I would have given it a higher rating if it had been priced at 85c.

Investors may be better off buying into SPH which gives the investor an exposure into both REIT and publishing. (I have not done any work on this idea though, you may want to work out your sums and tell me the results).

Happy IPOing. I will be vested via some placement shares.



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