Cascaden offers $0.9372 for SPH REIT – lowball?!

Here’s the video if you prefer to watch, else read on to find out more about the Offer.

The offer for SPH REIT is finally here after Cuscaden, a consortium comprising Mapletree with a 30% stake, Ong Beng Seng’s Hotel Properties Limited with 40% and a privatised Capitaland’s unit with 30% stake concluded the acquisition of Singapore Press Holdings (SPH).

As a refresher, shareholders of SPH had two options to choose from, an all-cash option or a cash & units option.

On 28 April 22, 42.1% of SPH’s shareholders elected the cash and units consideration while the remainder chose the all cash option. The default option for SPH’s shareholders was the cash and units option should they not complete their selection form.

The cash and units option was provided knowing that Cuscaden was required to make an offer under the Singapore Code on Takeovers and Mergers if Cuscaden secure more than 30% of total shares.

As a result of the election, Cuscaden will receive 26.1% of SPH REIT’s shares. Including SPH REIT’s units held by SPH after the completion of the distribution-in-specie by SPH, Cuscaden and its concert parties will own around 47.2% of the total issued SPH REIT’s units. This means Cuscaden will have to make a chain offer.

While it is mandatory for an offer to be made, Cuscaden has indicated that the offer is conditional upon the consortium obtaining at least 50% of SPH REIT. This means that with 47.2% holdings currently, existing shareholders must tender at least 2.8% of shares for Cuscaden to be willing to buy up all shares tendered.

If less than 2.8% of shares are tendered, Cuscaden will not buy a single additional share via this chain offer.

Cuscaden offers $0.9372 per SPH REIT share

The offer made was the minimum offer price required from a regulatory perspective, but is this a good price?

Here’re some comparisons. $0.9372 is:

• 3.9% below SPH REIT’s last traded price of 97.5 cents on Thursday (April 28).
• 2.8% below SPH REIT’s daily volume-weighted average price (VWAP) over the last month.
• About 1.9% above the NAV as at 28 February 22.
• But substantially below the 52-week high of $1.06 and pre pandemic high of $1.15.

Is this a good deal for SPH REIT’s shareholders?

With positive retail sentiments arising from the relaxation of COVID-19 related restrictions in both Singapore and Australia, one would wonder if Cuscaden is trying take private a S-REIT with prime retail assets such as Paragon and Westfield Marion before these assets and the rest of the portfolio make a full recovery.

Cuscaden said it does not intend to actively pursue the delisting of SPH REIT. However, based on the offer price, we think the signalling is clear.

Nevertheless, if the free float requirement that criteria of having “10% of units are held by the public” is not satisfied, Cuscaden will proceed to compulsorily acquire all outstanding units and delist SPH REIT.

Quarter Ended (cents)	2022	2021	2020	2019	2018	2017	2016	2015	2014
1Q	1.24	1.2	1.38	1.34	1.34	1.34	1.33	1.33	1.301
2Q	1.44	1.24	0.3	1.41	1.4	1.4	1.4	1.4	1.39
3Q	N.A.	1.38	0.5	1.39	1.37	1.37	1.36	1.35	1.35
4Q	N.A.	1.58	0.54	1.46	1.43	1.42	1.41	1.39	1.39
Total	N.A.	5.4	2.72	5.6	5.54	5.53	5.5	5.47	5.43

Based on the table above, while 1Q22 was still below historical performance, 2Q22 made a strong recovery when compared to pre-pandemic years. This begs the question as to whether SPH REIT can outperform pre-pandemic years for FY22.

Unfortunately, rental reversions were negative across all the Singapore assets, this may impede full recovery in the near term. Geopolitical tensions and supply chain issues have also caused higher inflation and will also indirectly impact operational costs such as utilities and repair and maintenance.

Central banks also intend to adopt tighter monetary policies in view of rising inflation which will likely lead to higher interest costs.

However, the overall portfolio is expected to deliver largely stable returns as occupancy rates remain high due to the quality of the assets. SPH REIT has also seen NAV increase as valuation of the assets increased due to the market recovery.

It also has the headroom to make approximately $1.7b of acquisitions before reaching the leverage ceiling of 50.0% and based on an existing gearing ratio of 30.1%, SPH REIT would be very much comfortable making at least half of that. This would allow for SPH REIT to acquire The Seletar Mall, a fully operational asset, should the asset be deemed suitable.

Most important question – could there be a better offer?

The fact of the matter is that SPH REIT does not really have a direct sponsor anymore since SPH was acquired by the Cuscaden consortium. It has only two ROFR assets left in its pipeline, both in Singapore, namely The Seletar Mall and The Woodleigh Mall. However, these two assets are substantial in size and would provide adequate growth opportunities to the portfolio. SPH REIT is also fully capable of managing the existing portfoilo and sourcing for its own acquisitions in future. 

As Cuscaden has indicated that it will not actively pursue the delisting of SPH REIT, this means that they may not provide an upgraded offer even if market participants call for it.

Should shareholders choose not to tender their shares in this offer, they would be left holding SPH REIT for at least another 12 months. This is because Cuscaden will not be able to make another offer for the next 12 months.

What we think

While the offer is reasonable, it may not be viewed as compelling. Although there is a view for an imminent recovery of the retail sector underpinned by a quality retail asset portfolio, investors should be wary of headwinds such as negative rental reversions, higher operating and interest costs.

While the offer is above NAV, it is below various share price metrics. The two ROFR assets in the pipeline will adequately provide for growth opportunities in the immediate future. Subsequently, SPH REIT may have to look for its own acquisitions should it still remain listed then.

At this point, shareholders have a choice of remaining invested in SPH REIT, a REIT that could see recovery and potential growth via acquisitions or tender their shares and reposition their cash to another investment.

Should shareholders remain invested, they may see a better offer on the table in future if the REIT can continue on its recovery track. Should a more compelling offer come through, shareholders may then reassess any revised offer on its own merits base on the prevailing market conditions at that point in time.