SINGAPORE (Oct 10): SPH REIT put in another resilient performance in the fourth quarter despite a muted retail environment. But analysts say the REIT could get an earnings boost from a possible acquisition.

“The Seletar Mall acquisition is around the corner,” says DBS Group Research lead analyst Derek Tan in a Tuesday report. He expects SPH REIT to complete the acquisition of The Seletar Mall from its sponsor in 2019.

As such, the brokerage is keeping its “buy” recommendation on SPH REIT, with a higher target price of $1.07, raised from $1.04 previously.

Tan believes the manager of SPH REIT could utilise its significant debt-funded headroom. “[We] now expect SPH REIT to raise $150 million via an equity fund raising exercise by the end of FY18F,” he says.

CIMB Research lead analyst Lock Mun Yee agrees that SPH REIT has room to tap inorganic growth on the back of its strong balance sheet.

“SPH REIT’s balance sheet is healthy with gearing at a low 25.4% as at end-FY17 and 85.9% of its debt cost on a fixed rate basis. Average cost of debt was at 2.82%. We believe this should enable SPH REIT to tap inorganic opportunities for growth,” Lock says in a Monday report.

CIMB is keeping its “hold” call on SPH REIT with a higher target price of $1.06, from $1.04 previously.

“With The Seletar Mall, SPH REIT will derive a higher proportion of its income from suburban shopping, which will enhance the portfolio’s resilience,” says DBS’s Tan. Post-acquisition, suburban shopping will account for 32% of SPH REIT’s income, compared to 20% currently.

According to SPH REIT manager, its two existing properties, Paragon and The Clementi Mall, managed to keep up their track record of full occupancy in 4Q17 amid mounting competition.

SPH REIT on Monday posted a 0.7% increase in distribution per unit (DPU) to 1.42 cents for 4Q17.

This brought DPU for the full year to 5.53 cents, 0.5% higher than a year ago.

“The better performance in FY17 was the result of higher contributions from both Paragon and Clementi Mall, and lower property expenses,” says CIMB’s Lock. She adds that the completion of asset enhancement initiatives at Paragon in mid-2018 should add a further 5,000 sq ft of leaseable area, and could provide a small boost for the REIT.

This article, written by Stanislaus Jude Chan, first appeared in The Edge Singapore.