• Although 2Q20 earnings were flat, expect a weaker 2H20. SPH has prepared for business impact from Covid-19 lasting up to 18 months, cutting dividends and putting all M&As on hold to conserve cash. The group’s recent S$500mn 3.2% coupon bond issued in January 2020 was timely, raising the cash pile to c.S$502mn and providing a stronger Cash/ST Borrowings buffer of 0.79x to tide through the period.
• Issuer profile: We view SPH as Neutral given its large cash pile, low levels of short term debt and manageable gearing levels, but this will be offset by the negative impact of Covid-19 on the business. The group has low funding requirements in the short term.
• Bond recommendation: On the SPHSP curve, we see value in SPHSP 4.5% PERP, offering a substantial spread increment of 68bps over the SPHSP 4% PERP despite SPHSP 4% PERP maturing eight months later. For its senior bond, we are neutral on the SPHSP 3.2% ‘30s, finding it priced in line with peers in the retail REIT sector curve.

Figure 1: SPHSP 4.5% PERP offers a substantial spread increment to SPHSP 4% PERP

Indicative prices as at 14 April 2020, Source: Bloomberg

(OW: Overweight, N: Neutral, UW: Underweight)

CREDIT VIEW

2Q20 results were flat. Revenues increased c.1.8%yoy to S$227.5mn on higher revenues (c.+33%) from the Property segment, offset by a decline in advertisement and circulation revenue of S$17.5mn (c.-18.3%) and S$2.2mn (c.-6.5%) respectively. Operating profits increased c.5%yoy to S$46.5mn on higher EBIT margins at c.28.9% (vs 2Q19’s c.26.3%) mainly due to the exclusion of land rent from FRS116 adoption. OCF was a negative S$43.2mn from higher working capital.

Interim dividend was cut by c.73%yoy to 1.5 cents to conserve cash.

Expect a weaker 2H20 impacted by Covid-19. Media segment outlook is poor, with recession fears exacerbating the already declining advertising revenues, while the property segment (retail malls and purpose-built student accommodation (PBSA)) suffers from stay-home measures. These challenges will be partially offset by c.S$30mn if wage support from the recent Budget. SPH REIT, however, of which the group owns 70%, will be fully passing on all property tax rebates given by the Inland Revenue Authority of Singapore to its tenants.

Interest coverage lower from higher interest expenses. EBITDA interest coverage fell c.18.3%yoy to 4.58x as interest expenses rose by c.+38.7% to S$17mn, mainly due to interest costs on the S$500mn 3.2% coupon MTN issued in January 2020 and loan facilities taken up to fund the acquisition of new assets in the PBSA portfolio and Westfield Marion. SPH has S$450mn in outstanding perpetuals. Assuming it pays out S$18.75mn in distributions p.a, S$4.7mn per quarter and taking 50% of this as interest, we find EBITDA/(Interest plus 50% perpetual distribution) at 3.59x.

Low near-term financing needs. As at 29 February 2020, SPH faced S$621.5mn in short term debt, representing c.21% of total debt. This short term debt is largely covered by the group’s cash pile of c.S$502mn, representing Cash/ST Borrowings of c.0.79x. We find gearing (D/A) at c.35.8% and net gearing at c.29.9% still manageable should SPH require refinancing, while the group maintains it has considerable access to unused credit lines.

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