Suntec REIT (SUN SP) - Maybank Kim Eng 2016-09-08: Some Cushion for Impending Weakness

Suntec REIT (SUN SP) - Maybank Kim Eng 2016-09-08: Some Cushion for Impending Weakness SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT (SUN SP) - Some Cushion for Impending Weakness


Raise TP but maintain HOLD; prefer CCT 

  • We raise our yield-based TP to SGD1.81. Our new target yield of 5.5% (from 6.0%) prices SUN at the low end of its historical trading range.
  • Stable capital values for office properties and a potential bottoming of office rents in the next 5-6 quarters should be positives. But with over 40% of its office leases up for renewal in the next two years, SUN is more exposed than peers to still-weak rents. 
  • We lower market rent assumptions by up to 14% for office and cut passing rents for retail by 5%, which lowers our FY16-18 DPUs by up to 5.5%. Retail rents and occupancy at its Suntec City Mall have shown signs of weakness recently.
  • Nevertheless, maintain HOLD as we think capital distributions could cushion downside to property income.


Least-favourable office lease-expiry profile 

  • SUN’s stakes in One Raffles Quay and MBFC Phase 1 should benefit directly from strong office capital values in the vicinity. However, its office lease-expiry profile is the least favourable among peers. Some 40% of its office leases will be up for renewal in the next two years: 17% in 2017 and 24% in 2018. This could force SUN to lock in lower rents at a time of market weakness or risk rising vacancies. 
  • Nonetheless, we think management could cushion the impact on its DPUs with capital distributions from the sale of Park Mall.


Retail weakness showing 

  • Committed rents for Suntec City Mall were down 3.5% QoQ in 2Q16 to SGD11.58 psf pm. Committed occupancy also slipped 1.2ppts to 97.5%.
  • We think these may be early signs of weakness for its retail portfolio.


Risks 

  • Our forecasts assume a bottoming of office rents by end-2017 and the start of a recovery in 2018. A prolonged office downcycle poses risks to our estimates.


Swing Factors


Upside

  • Appreciation in capital value of its properties.
  • Stabilisation of retail market.
  • Earlier-than-expected rebound in office rents.

Downside

  • Sharper-than-expected declines in office rents or occupancy.
  • Overpaying for acquisitions.
  • Cost overruns in Park Mall redevelopment.




Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-09-08
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.81 Up 1.690


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