SK REIT
The author is an analyst for NH Investment & Securities. She can be reached at eunsang.lee@nhqv.com -- Ed.
At SK REIT, we expect: 1) the incorporation of a water treatment facility; 2) special dividends on the sale of gas stations; and 3) interest cost reduction effects from capital increase. We recommend adding exposure at a low price during the capital expansion period, as DPS should climb from 4Q23.
Bargain buying opportunity
We maintain a Buy rating and TP of W6,000 on SK REIT. Despite a likely uptick in finance costs in 2H23 due to a temporary rise in debt related to its water treatment facility, such negative is to be offset by: 1) incorporation of the water treatment facility (from 1Q24); 2) special dividend payout related to the disposal of gas stations (4Q23); and 3) interest cost reduction (4Q23) after rights offering. During the rights issuance period, share price decline is likely for SK REIT. And, refinancing of W1tn scheduled for 2H24 presents an additional risk factor. Nevertheless, as DPS is expected to rise over the next year, we recommend increasing exposure at a low price during the rights offering period. Based on the current share price, 12-month forward DY comes to 7%.
DPS to climb from 4Q23
SK REIT has decided to incorporate SK Hynix’s Icheon Waste Water Treatment Center via the establishment of subsidiary REIT #3. At a cap rate of 6.4%, the new asset should be strongly competitive. Assuming: 1) related quarterly interest expense of W9.4bn; 2) quarterly lease revenue of W17.6bn; and 3) a projected uptick in number of shares following the rights offering, we expect SK REIT’s DPS to climb by W18 from 4Q23.
On Jul 17, SK REIT announced to dispose of two gas stations. Considering the expected proceeds of W15.7bn and related commissions, the firm should be able to distribute a special dividend of W46 per share in 4Q23.
On Jul 27, SK REIT revealed plans for a rights offering of W330bn. Although the scale of capital raised could be lessened by share price decline during the rights issuance period, even if assuming such a decrease, DPS should climb by an additional W6~7 thanks to debt repayment using the rights offering funds.