Suntec REIT - Maybank Kim Eng 2016-01-13: Unjustified Valuations

Suntec REIT - Maybank Kim Eng 2016-01-13: Unjustified Valuations SUNTEC REIT SUNTEC REAL ESTATE INV TRUST T82U.SI 

Suntec REIT (SUN SP) - Unjustified Valuations 


Maintain SELL & SGD1.33 TP 

  • We are negative on Suntec REIT as 23% of its office leases will expire this year. This may force it to lock in unfavourable rents in a year of oversupply. 
  • We expect vacancy to rise given its large exposure to weakness in the financial sector. 
  • While management could use part of its proceeds from the sale of Park Mall to cushion a fall in distribution, we caution that this is not reflective of its underlying business performance. 
  • Unitholders will also assume higher risks from the redevelopment of Park Mall, which it retains a 30% interest. 
  • Our TP of SGD1.33 remains based on an FY16 yield target of 7.25%. 

Highest exposure to market weakness 

  • With 23% of its office leases due to expire this year, Suntec REIT may be forced to accept unfavourable rents in a year of oversupply. 
  • We expect CBD vacancy to rise above 11% by end-2016 and rent declines to accelerate. 
  • Furthermore, exposure to weak hiring sentiment in the financial sector is high, at 48% of its office income. 

DPU not supported by underlying strength 

  • We expect management to use part of its proceeds from the sale of Park Mall to cushion income losses. However, we caution that DPU distribution will not be reflective of its underlying business performance. 
  • Unitholders will also assume higher risks from the redevelopment of Park Mall, which it remains a 30% interest. 
  • Current valuations not justified Suntec trades at a narrower yield than sector benchmark, CapitaLand Commercial Trust (CCT SP, HOLD, TP SGD1.25). We think this is not justified, as prospects for the latter are clearly more favourable. 
  • CCT is our preferred exposure to office REITs.



Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-01-13
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.33 Same 1.33


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