Suntec REIT (SUN SP) - Maybank Kim Eng 2017-07-26: Strong Offices, Weak Retail

Suntec REIT (SUN SP) - Maybank Kim Eng 2017-07-26: Strong Offices, Weak Retail SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT (SUN SP) - Strong Offices, Weak Retail


Raising TP for office beat; Stay HOLD 

  • While Suntec REIT's 1H17 DPU was in line at 51% of our FY17E, distributable income from operations were slightly ahead as Suntec offices beat expectations.
  • We raise FY17E DPU by 2.7% for this but trim FY18-19E by 1% for an enlarged share base from recent CB conversions. We raise Target Price to SGD1.80 from SGD1.76 accordingly, still based on a yield target of 5.50%. 
  • Maintain HOLD for unattractive valuation. Prefer CapitaLand Commercial Trust (CCT) for sector exposure.


Suntec offices outperformed 

  • SUN’s 5% YoY improvement in distributable income from operations was ahead of expectations due to a better showing from Suntec City offices.
  • Our expectations of weaker occupancy and lower signing rents did not materialise and we raise assumptions accordingly. 
  • The YoY DPU dip was due to an enlarged share base from the conversion of SGD166.6m convertible bonds. The redemption of another SGD45.5m brought gearing down to 36.1% (1Q17: 37.7%).


Scope for retail improvements in the medium term 

  • Negative rental reversions continued to weigh on income contribution at Suntec City Mall. 
  • Management is responding by improving its tenant mix and right-sizing unit space. It expects to cut up 20% of the mall into smaller units, which could help lift yields. 
  • While performance could remain weak during its 6-month transition, we see scope for improved mall performance in the medium term. 


New acquisition Down Under 

  • Management also announced the acquisition of a 50% stake in an office building under construction at 477 Collins Street, Melbourne, Australia for AUD414m. SUN will not bear development risks and has, in fact, been given a 5-year rental guarantee on unlet space. The property’s entry yield of 4.8% and annual rental escalations of 3.50-3.75% upon completion in mid-2020 are fairly comparable to our estimated entry yield of 5.0% for KREIT’s recently acquired 311 Spencer Street. 
  • Unlike KREIT’s lack of income during construction, SUN will receive 4.8% coupons on progress payments during construction. This debt-funded deal and SUN’s potential acquisition of another 25% stake in Southgate are expected to push its gearing to 40%. 
  • Its share of debt for 9 Penang Road could further lift this to 42%.


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/ 2017-07-26
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.80 Up 1.760



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