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SPH or SPH REIT?

Sunday, July 14, 2013

Some people are surprised to learn that I am not all that interested in SPH REIT. Instead, I am more interested in SPH. Why is this so?

I do not think SPH REIT particularly attractive with an estimated distribution yield of about 5.6% although a gearing level of about 30% is comfortable. A yield of about 6% without a higher gearing level would be what is needed to attract me. Otherwise, I think I am better off increasing my investment in SPH.

Simplistically, if I could get a 5% dividend yield by being a shareholder of SPH which will also see its gearing level drop to almost zero with a bigger cash hoard after setting up SPH REIT, why would I still be interested in the REIT?

OK, before I go on, I must say that I am speaking from the point of view of someone who already has a substantial exposure to S-REITs. For someone who has no exposure to S-REITs yet, SPH REIT's IPO does seem like a decent enough proposition.

Some quick calculations show that SPH will see a slight decline in its income by having its ownership of the two malls diluted. So, logically, we would see a decline in its annual dividends paid to shareholders as well, everything else remaining equal. Proportionally, instead of 24c DPS, we could see 21c DPS in future.

In the recent market weakness, I bought more shares of SPH. Assuming an average price of $4.20 a share, a 21c dividend represents a 5% yield. On top of this, the management has promised an 18c special dividend because of the REIT's IPO. This is an additional 4.28% return.

My purchases last month were the highest prices I have ever paid for SPH's stock. Prior purchases were made at between $2.86 and $3.55 a share. However, believing that the management has unlocked value for SPH shareholders in this latest exercise, I am willing to pay reasonably higher prices for the company's stock.


Technically, a pull back could see SPH's share price retreating to test support at $4.22 while any further rise in price could meet with resistance at $4.39. Fellow SPH shareholders want to approach this cautiously since the stock is spotting a downtrend and we don't want to be caught buying at resistance.

Related posts:
1. Which stocks have I been accumulating in June 2013?
2. SPH: A REIT investment.
3. SPH: Better investment than retail S-REITs?

20 comments:

Kyith said...

there wont be a decline. the management fees will make it back to 100mil odds. its the media business possibly declining further that will be the drag.

AK71 said...

Hi Kyith,

I was under the impression that even with the management fees, SPH will still experience a slight decline in total income, post SPH REIT IPO.

If there won't be a decline as per my estimate, then the thesis for investing in SPH instead of SPH REIT is stronger than before.

Thank you for the good news! :)

AhJohn said...

Hi AK, good post! Consistent thoughts.
Btw, how you measure a stock's "value"? Especially none REIT stock. Thanks!

AK71 said...

Hi AhJohn,

I like to think that I have a sound strategy and since it is supposedly a sound strategy, I want to stick to it. The only way is to stay consistent. ;)

Well, there are so many ways we can value a stock and I am sure you have heard of them. In the case of SPH, I simply look at its EPS, DPS and gearing. Why?

Since it pays out most of its earnings as dividends, it is REIT like. So, I use metrics used in valuing REITs.

Thus, if I can get a 5% yield in a REIT with prime properties and has a gearing that is close to zero, does that present good value?

Anonymous said...

Hi AK,

You always provide very useful insides about stocks. Hope to learn more from you.

Thanks
Vanson

AK71 said...

Hi Vanson,

I share what little I know and I am glad you find it useful. :)

AK71 said...

Good news for SPH shareholders:

Media group Singapore Press Holdings said it will raise $504 million in a REIT offering after pricing the IPO at the top end of an indicative range of 85 to 90 cents per unit.

Called SPH REIT, the trust’s assets will include the luxury Paragon mall in the prime shopping district of Orchard Road and the suburban Clementi Mall.

“As a result of indications of interest received from institutional investors during the bookbuilding process, amounting to approximately 42 times the number of units offered under the placement tranche, the units have been priced at the top end of the offering price range at $0.90 per unit,” SPH said in a statement on Wednesday.

Singapore has seen strong demand for REITs and business trusts as investors search for higher yields.

The retail tranche for the IPO opens on Wednesday and the listing will be on July 24.

REUTERS

lofan73 said...

hi ak71

from ur point of view,will it b better to accumulate more sph once the listing of the reits?

AK71 said...

Hi lofan73,

I don't really see a difference. I will accumulate when I feel that there is good value.

I invest in SPH for income and I bought more at $4.20 because it would give me a yield of 5% to 5.7% per annum at that price. Also, the 18c special dividend that has been promised is a one off 4.29% return. :)

AK71 said...

The macro developments overnight could help to lend support to dividend plays in Singapore today, and if expectations are sustained, SPH REIT’s IPO, which is scheduled for 24 July 2013 (tomorrow), is likely to perform well on its debut. - Lim & Tan.

AK71 said...

The public offer of 84 million units, which closed on Monday, received 71,190 valid applications for 2.1 billion units. This meant it was about 25 times subscribed.

AK71 said...

SPH REIT, the owner of the Paragon mall along Singapore’s shopping belt, gained on its first day of trading as investors were attracted by returns higher than those of comparable properties.

The shares jumped 11% to 99.5 cents as of 2:03 p.m. local time. The stock was offered at 90 Singapore cents apiece, the top end of its price range. They started trading at 2 p.m. Singapore time and were 37 times subscribed.

“It was super oversubscribed as bond yields have stabilized a bit of late, which helped investor interest pick up,” Vikrant Pandey, a Singapore-based analyst at UOB Kay Hian Pte said. “Also retail assets are considered more of a defensive play so thats helped generate interest too.”

Source: Bloomberg.

Chris Lim said...

AK said...
"Simplistically, if I could get a 5% dividend yield by being a shareholder of SPH which will also see its gearing level drop to almost zero with a bigger cash hoard after setting up SPH REIT, why would I still be interested in the REIT?"

REIT has to pay dividends right?
Non-REIT don't have to if the earning cannot be substantiated. I think SPH stopped giving dividends during 2004.

SPH Reit share price has been trading between 90c to $1.07 all these while (from IPO till 2018).
SPH price was trading at the lowest of $2.45 in GFC and has been trading sideway at $3.90 and $4.15 during the years of 2013 and 2014.

Given the above facts, wouldn't it be riskier to set SPH as an income counter instead of SPH reit? Please share with me your thoughts on my views.

The prices are gotten from google chart.

AK71 said...

Hi Chris,

Hindsight is always perfect. ;)

If SPH's business was not disrupted by the digitisation of the printed media, it would have been a better investment than SPH REIT.

I explained before the difference between investing in a business and investing in a REIT.

A recent example:
2Q 2018 Passive Income From Non-REITs.

AK71 said...

You might also be interested in this blog:
Sizing my investment in SPH.

Chris Lim said...

Thank you for the links.
(Zooming off... to the links)

Chris Lim said...

I just finished reading through your post in 'Sizing my investment in SPH' together with the comment list.

From your post '2Q 2018 Passive Income From Non-REITs', the following read out loud to me.

Business (such as Singtel) ought to weather better during a downturn compare to REIT since the former has growing retained earnings while REIT empty their pocket.

How are REITs' gearing differs from the borrowing/loans that Business runs? After all, both borrows.

PS: I also read up this article before i ask the above question - https://www.fool.sg/2013/08/23/what-is-gearing-ratio/

AK71 said...

Hi Chris,

I am going to recommend a better online resource for you than fool.

www.investopedia.com

You will find answers to many of your questions here.

To get you started:

https://www.investopedia.com/terms/g/gearingratio.asp

"The best known examples of gearing ratios include the debt-to-equity ratio (total debt / total equity), times interest earned (EBIT / total interest), equity ratio (equity / assets), and debt ratio (total debt / total assets)."

Businesses usually use debt to equity ratio.

REITs usually use debt ratio.

Have fun. ;)

Chris Lim said...

Thank you!

I also read investopedia. Compare fool with investopedia, i find the latter more information but also harder to digest.

AK71 said...

Hi Chris,

Investopedia is definitely more comprehensive.

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