SPH – CIMB

Tops bid for Sengkang site

Coming in at a 21% premium over the next highest bid, we believe that SPH/UE JV’s bid for the Sengkang retail site is aggressive, notwithstanding the site’s good attributes. Implied 5%yields on breakeven costs are also below cap rates for suburban retail.

We keep our estimates and SOP target price unchanged pending an award of the tender. Maintain Neutral as decent yields of 6% remain balanced by risks of receding ad growth and investments.

What Happened

SPH in a 70:30 JV with United Engineers has come out tops in a bid for a greenfield Sengkang retail site at S$328m (S$1,156 psf ppr) or 21% above the next highest bid. The 99-year leasehold site attracted a total of 12 bidders. Site is targeted for a retail development with maximum GFA of 283,856sf.

What We Think

Management appears to be pricing in a premium in its bid. Factoring in development and other costs, breakeven is estimated at about S$2.5k psf, which translates to yields of about 5.1% assuming rentals of S$15 psf. This compares negatively with typical yields of 5.5-5.6% expected on suburban malls. While the site is well-located near the Fernvale LRT station with potential good rental growth and catchment, we see some competition from Compass Point (next to Sengkang MRT station). A redeeming factor could be its partnership with United Engineers, which could cap or even lower its development costs and risks–we understand that SPH has an agreement with United Engineers whereby the latter bears cost overruns during construction. Funding is not expected to be a problem given its strong balance sheet.

What You Should Do

We see the positive of utilising its balance sheet outweighed by the slight negative of a fairly high bid price. Maintain Neutral as decent yields of 6% remain balanced by risks of receding ad growth and investments.