3 reasons why SPH REIT listing approval is positive news

It frees up capital, for one.

Aside from unlocking funds that may be used to propel future growth, Maybank Kim Eng said the newly approved REIT listing will also create a more efficient platform for its holdings of investment companies and generate management fee income that will boost SPH bottom line.

Here's more from Maybank:

REIT spinoff a big step further. SPH has received the approval from SGX for the proposed SPH REIT listing. Initial portfolio includes Paragon (SGD2,500m) and Clementi Mall (SGD570m) as expected. SPH will hold about 70% of the proposed REIT after IPO. If the proposal is approved by shareholders at the EGM on 18 June, the REIT is expected to be listed in early July, which is earlier than we expected before. We overall like this practice as it can 1) free up capital for future growth, 2) create a more efficient platform for the holdings of investment properties and 3) generate management fee income for SPH. We maintain our BUY call and target price SGD4.95.

Special dividends of 18 cents less than expected. SPH is expected to receive net cash proceeds of SGD1048m (after paying off the bank borrowings of SGD300m). A special dividend of SGD0.18 per share was proposed, which implies an additional 4% dividend yield for FY13. Around SGD700m could be left after paying the special dividends and it gives SPH sufficient capital to pursue growth opportunities in the future. The proposed special dividend is slightly below expectation but it is in line with SPH’s strategy of rewarding long term investors.

DPU could be maintained despite dilution in EPS. Due to the 30% dilution in property sector, we expect EPS to be diluted by 2cents/share. But the cash proceeds from the REIT spinoff could give SPH ample headroom to raise payout ratio in order to maintain current 24cents/share dividends track record in the short to medium term. Going forward, we do not think that SPH will sit on the cash pile and do nothing at all. Some meaningful investments could be made following the restructuring that can offset the dilution effect in the long term.

Valuation and recommendation. We lower our EPS forecast for FY14/15 due to the dilution effect but maintain our DPS forecast of 24cents/share in the next three years. The dividends yield of 9.3/5.3/5.3% for FY13/14/15F looks quite attractive at current yield compression environment. Reiterate BUY and target price of SGD4.95.