Top Stock Highlights of the Week: CICT and FCT Bid for Mercatus, Parkway Life REIT and SBS Transit
Welcome to this week’s edition of top stock highlights where we feature interesting business snippets from earnings announcements and news reports.
Bids for Mercatus’ retail portfolio
It was just around two months ago when we wrote about Mercatus Co-operative, a unit of NTUC, offering a bunch of its retail properties for sale.
The estimated valuation for this portfolio is above S$4 billion.
Back then, we speculated that several retail REITs in Singapore may be interested contenders for these assets as they include popular suburban malls such as Jurong Point and a 50% stake in Nex mall.
Now, the names of some of the contenders have been revealed, and we were spot on.
The reported contenders include CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT, Hong Kong-listed Link REIT (HKSE: 0823), Frasers Centrepoint Trust (SGX: J69U), or FCT, and Lendlease Global Commercial REIT (SGX: JYEU), or LREIT.
The size of the portfolio, however, means that the winning bidder should have both financial heft and access to capital.
A strong sponsor could provide the REIT with both.
CICT’s sponsor is property giant CapitaLand Investment Limited (SGX: 9CI), FCT has Frasers Property Limited (SGX: TQ5) as its sponsor, and LREIT has Australia-listed property company Lendlease Group (ASX: LLC) as its sponsor.
However, it remains to be seen if any of the REITs can digest such a large acquisition without taking on significant debt or resorting to an equity fundraising exercise.
CICT’s aggregate leverage has exceeded 40%, clocking in at 40.6% as of 30 June 2022.
The retail cum commercial REIT may need to tap on capital markets to consummate a deal to prevent its gearing level from breaching the 50% threshold.
LREIT’s gearing is also at the 40% level, but its manager has indicated that it is out of the running for these properties.
FCT has lower aggregate leverage at 33.9% and Mercatus’ assets will also complement its portfolio of suburban malls.
The outcome of these bids will be closely watched and it’s anyone’s guess if either of these REITs or another unnamed contender may snag these valuable malls.
Parkway Life REIT (SGX: C2PU)
Parkway Life REIT has extended its unbroken track record of consecutive increases in distribution per unit (DPU).
The healthcare REIT has announced a respectable set of earnings for its fiscal 2022’s first half (1H2022).
Gross revenue inched up 1% year on year to S$60.2 million, contributed by the acquisitions of three nursing homes in Japan last year as well as higher rent from its Singapore hospitals.
Net property income increased by 1.1% year on year to S$56 million as property expenses increased by just 0.7% year on year.
DPU improved by 1.5% year on year to S$0.0706, taking annualised DPU to S$0.1412.
Assuming Parkway Life REIT can keep up this momentum, FY2022’s DPU will be marginally higher than FY2021’s DPU of S$0.1408.
The healthcare REIT’s gearing stood at 32.5% as of 30 June 2022, giving the REIT a debt headroom of close to S$790 million before hitting the 50% threshold.
Debt metrics look healthy with a very low cost of debt of 0.61% and a high-interest cover ratio of 19.8 times.
Close to 82% of the REIT’s borrowings are hedged, thus protecting it from sharp rises in interest rates.
SBS Transit Limited (SGX: S61)
SBS Transit, or SBST, also reported its 1H2022 results this week.
Revenue rose 14.3% year on year to S$732.4 million as public transport ridership improved with the opening up of Singapore’s economy and all workers being allowed to return to their offices.
Operating profit improved by 12.6% year on year to S$43 million.
However, if the COVID-19 government relief amount of S$34.6 million was adjusted from 1H2021’s results, then SBST’s operating profit would have soared from S$3.6 million a year ago to S$43 million in 1H2022.
Net profit dipped by 5% year on year due to a significantly higher tax expense for the group.
SBST saw average daily ridership for the North East MRT line increase by 14.6% year on year to 445,000 trips, while its Downtown MRT line saw ridership jump by 17.4% year on year to 327,000 trips.
The group warns that revenue from the bus business will be lower from 1 September as the extension of five negotiated bus packages is based on lower service fees.
Coupled with higher wage costs and elevated fuel prices, SBST expects pressure on its bottom line.
The group has declared an interim dividend of S$0.0545, slightly lower than the S$0.0575 paid out a year ago.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
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