Suntec REIT (SUN SP) - Maybank Kim Eng 2016-10-21: Retail headwinds showing

Suntec REIT (SUN SP) - Maybank Kim Eng 2016-10-21: Retail headwinds showing SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT (SUN SP) - Retail headwinds showing


Maintain HOLD with TP lowered to SGD1.77 

  • 3Q16 was a miss due to a lower than expected retail performance. 
  • We trim DPU by 2.5% and lower TP 2% to SGD1.77 based on an unchanged target yield of 5.5%. 
  • We believe persistent headwinds to Suntec’s retail business will continue to weigh on income and stock sentiment. 
  • Maintain HOLD. 
  • KREIT (BUY, TP SGD1.21) and CCT (BUY, SGD1.81) could outperform Suntec REIT due to better income stability from more favourable office lease expiry profiles and WALE.


Retail performance a miss 

  • 3Q16 was a marginal miss with 9M16 at 71% of our full-year estimate.
  • Retail headwinds appear to have intensified with committed passing rents at Suntec City falling another 3.4% QoQ to SGD11.19 psf pm. Occupancy also dipped by 0.7ppt to 96.8%. 
  • While management has stepped up promotional activities to enhance retail traffic, uncertain economic conditions could continue to weigh on retail spending. 
  • Another SGD4m of capital was distributed in the quarter, bringing total non-core distributions to SGD16m in 9M16 (FY15: 19m). 
  • On a positive note, financing costs trended lower to 2.28% due to a lower funding cost from the 1.75% SGD300m convertible bonds issued and the fall in Swap Offer Rate (SOR). 
  • No updates were provided for the Park Mall redevelopment.


Offices holding up well 

  • While retail performance was weak, Suntec’s office portfolio is doing much better. 
  • Occupancy at Suntec City offices held up well at 98.9% with signing rents inching up by 2.3% to SGD8.78 psf. 
  • Management continues to guide for a steady office outlook as it believes that convenient access to retail amenities remains a key value proposition to its office tenants.
  • ORQ and MBFC were fully leased.



Prefer KREIT and CCT 

  • We believe stronger WALE for KREIT (6.1 years) and CCT (6.8 years) provides better income visibility over Suntec REIT (FY15: office/retail 3.4/2.2 years). 
  • With the uncertain macro conditions, we believe income stability remains a priority for investors. 
  • Furthermore, retail headwinds at Suntec City could continue to weigh on stock sentiment.


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/ 2016-10-21
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.77 Down 1.810



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