ETF Background
The LP SREIT is an investment product that provides investors with exposure to a diversified portfolio of Real Estate Investment Trusts (REITs) listed in Singapore. It replicates closely the performance of the Morningstar® Singapore REIT Yield Focus Index. Established in 2017, LP SREIT comprises of 21 securities with a market cap of S$355 mn as of 31 March 2024. Among the five REITs ETFs in Singapore, it is the second largest in terms of market cap.
Investment Merits
ETF Benchmark
LP SREIT replicates as closely as possible the performance of the Morningstar® Singapore REIT Yield Focus Index, which is designed to screen for REITS with high dividend, good profitability track record and less likelihood of default. Regarding constituent selection, each S-REIT is evaluated based on three proprietary factors: quality, financial health and trailing 12-month dividend yield, with all these factors given equal weight in the assessment. A 10% weightage cap is imposed on each S-REIT to promote diversification.
S-REITs with the highest scores are incorporated into the Index. The final weighting of each underlying S-REIT is then adjusted based on its trading liquidity, ensuring the ETF can effectively mirror the constituents. With a bi-annual rebalancing schedule, the Index constructs a diversified portfolio. By mirroring this Index, the LP SREIT provides investors with access to sustainable income.
*Both Phillip Capital Management and Phillip Securities Research are part of the Phillip Capital Group.
Valuation
Dividend Yield Spread valuation
Dividend Yield measures the annual value of dividends received relative to the market value per unit of a fund. We will use the average dividend yield spread to a 10-year bond (Figure 4) to do a valuation. LP SREIT has had an average 2.66% spread to a 10-year bond since its inception. The three-year average is 2.55%. The current spread is 2.79%.
We peg our valuation at 2.55% dividend yield spread, its 3-year average spread. We believe that is appropriate to accounts for the recent rise in interest rates. At a 2.55% dividend yield spread, we value LP SREIT at S$0.85.
To determine the range of valuations, we applied a 5% and 10% discount and premium to both Dividend Yield Spread and Forward Dividend (Figure 1). At the bottom end of our valuation range, with a 10% higher projected dividend yield spread and a 10% lower forward dividend, the ETF price is S$0.73 (Figure 1). At the top end of our valuation range, we use a 10% lower projection of Dividend Yield Spread and a 10% higher Forward Dividend, and the ETF price is S$0.98.
Price-to-Book valuation
The book value of a company is the company’s total assets minus its total liabilities. We will be using the Price-to-Book ratio (Figure 7), which is calculated by weighting the average of ETF constituents’ Price-to-Book ratio. Lion-Phillip S REIT has traded at an average P/B of 1.16x since its inception. The three-year average is 1.14x. The current P/B is 0.96x.
We peg our valuation at 1.14x P/B, its 3-year average P/B. We believe that is appropriate to accounts for the recent rise in interest rates. On this basis, we value LP SREIT at S$0.97 (1.14x P/B).
To determine the range of valuations, we applied a 5% and 10% discount and premium to both Book Value and P/B metrics (Figure 5). At the bottom end of our valuation range, with a 10% lower projected book Value and a 10% lower P/B of 1.03x, the ETF price is S$0.78 (Figure 5). At the top end of our valuation range, we use a 10% higher projection of book value and a P/B of 1.25x, and the ETF price is S$1.17.
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Helena covers Hardware/Marketplaces/ETF. Helena graduated with a master degree in Financial Technology from Nanyang Technological University
