Patience is key
2Q15 DPU was 2.5Scts (+10% y-o-y)
Suntec AEI is progressing slowly amid retail headwinds
Near term earnings weakness likely to be supported by distributions from capital
Maintain HOLD, TP S$1.76
Highlights
- Results slightly below.
- Suntec REIT reported 2Q15 revenue of S$81m (+20% y-o-y) and NPI of S$57m (+25%), largely due to higher income contribution from Phase 2 of AEI works at Suntec Mall, which opened in June 2014.
- Distributable income rose 11% y-o-y to S$63m, with operating income of S$57m (+10%) supported by S$6m of capital distributions (+20% y-o-y). This translated to 2Q15 DPU of 2.50Scts (+10%).
- Excluding distributions from capital, underlying DPU of 2.3Scts would have been 9% higher y-o-y.
Outlook
Suntec City retail will take some time to stabilise.
- Phase 3 of AEI works, which achieved TOP in Jan-15, has achieved 86% commitment rate, bringing total committed occupancy for the entire Suntec City retail component to 95.3%. The redevelopment is likely to miss the Manager’s internal 10% IRR target rent of S$12.59 as Singapore’s retail outlok has deteriorated in the past two years.
- The Manager has reported stabilised passing rents of S$12.12 psf/mth, which is a fairly commendable result, given the mall’s large footprint (970k sqft).
Updates on the Park Mall divestment.
- On 30 June, the Manager announced the divestment of Park Mall for S$411.8m, implying S$1,541 psf and NPI yield of 4.6%.
- Suntec REIT will subsequently take a 30% stake in a JV Co with Singhaiyi Group (35%) and Haiyi Group (35%) to completely redevelop the property, which will feature two office towers accounting for c.45% of total NLA each and a retail podium, which will take up the remaining 10%.
- Development is expected to take four years, and will likely only begin in 2H16, as the Manager can only begin serving its six months notice to tenants from Jan-16 onwards.
- The Manager intends to use proceeds from the divestment to pay down debt, invest in the JV Co (S$115m), as well as to support distributions during construction in order to ensure stable dividends for unitholders.
Valuation:
- We have a HOLD recommendation for Suntec REIT, with a DCF-backed TP of S$1.76.
- We have forecasted a 4% decline in DPU from FY16 onwards to account for the divestment of Park Mall.
- In our previous report, we lowered our rental assumptions for Phase 3 of AEI and adjusted our AUD assumptions.
- At current price, Suntec REIT offers investors dividend yield of 5.5%-5.8% for FY15-FY16, which is fairly attractive, in our view.
- However as total returns are still < 10%, we maintain our HOLD call.
Key Risks:
Interest rate risk
- As Suntec will begin to earn rental income in Australian dollars from 2016 onwards, it is vulnerable to exchange rate volatility, and any depreciation of the Australian dollar to the Singapore dollar in the future would negatively impact expected distribution income.
Slower ramp up of Suntec AEI.
- Although the AEI works at Suntec City retail has been completed, Phase 3 in particular is taking a longer than expected time to fill up occupancies amid retail headwinds.
- Slower ramp up of operations for the mall could present downside risks to our earnings estimates.
(Rachael TAN , Derek TAN)
Source: http://www.dbsvickers.com/
