RHB Research 2015-07-24: Suntec REIT - Facing Short-Term Headwinds. Maintain NEUTRAL.

Facing Short-Term Headwinds

  • Suntec REIT’s 2Q/6M15 DPU grew 10.3%/5.2% YoY, accounting for 47.9% of our full-year estimate. 
  • Maintain NEUTRAL with a lower DDM derived TP of SGD1.75, implying a 7.8% total return. 
  • The entire remaking of Suntec City achieved a 93.6% committed occupancy to date but committed passing rent was at the low end of our estimates at only SGD12.12 psf/month. 
  • Office portfolio occupancy also dropped to 99.0% from 99.6%. 

 2Q15 results in line with our expectations. 

  • Suntec REIT’s 2Q/6M15 DPU at 2.50/4.73 cents (SGD) accounted for 47.9% of our full-year estimate. 
  • Suntec has topped up ~1.49 cents, or SGD35.5m since 1Q13. 
  • Recall that the REIT received cash proceeds of SGD147m and booked SGD29.7m of divestment gains from the sale of Chijmes in 1Q12. 
  • Financing cost inched up modestly to 2.70% from 2.53% in the quarter before, while leverage was also up to 36.2% from 35.7%. 

 Declining passing rent for Suntec City’s asset enhancement initiative (AEI). 

  • Suntec City’s remaking achieved 95.3% (previously 93.6%) committed occupancy to date. 
  • Despite the opening of Phase 3, we note that leasing activity has been slow for the refurbished mall. 
  • We also note that overall passing rent has consistently fallen 3.7% to SGD12.12 psf/month ever since its first launch of Phase 1, below its initial target of SGD12.59 psf/month. 

 Redevelopment of Park Mall should benefit Suntec only in the long run. 

  • The recent proposed divestment of Park Mall has also prompted us to be wary of Suntec REIT’s effort to redevelop the office building. 
  • We think that the redevelopment of Park Mall will only be beneficial to the REIT in the long run (target completion: 2019), while facing headwinds in the nearer term as income contribution declines. 

 Maintain NEUTRAL with a lower TP of SGD1.75 (from SGD1.81). 

  • We expect the REIT to continue to face headwinds as it resumes its AEI and redevelopment efforts. 
  • We think that the only catalyst for Suntec REIT is its possible capital distribution from the divestment of Park Mall. 
  • We maintain our NEUTRAL call until we have a further catalyst. 

(Ong Kian Lin; Ivan Looi)

Source: http://www.rhbgroup.com/