Suntec REIT - Maybank Kim Eng 2016-01-27: Narrow yield not justified

SUNTEC REIT SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT (SUN SP) - Narrow yield not justified

We lift our FY16-17 DPU by 5.1%/2.4% and raise our TP to SGD1.40 (from SGD1.33), based on unchanged FY16E target yield of 7.25%. Maintain SELL.
We believe the REIT’s narrow trading yield is not justified as it includes significant capital distributions that do not reflect the underlying performance of its properties.

4Q15 DPU of 2.75 SGD cts (+9.0% QoQ, +6.7% YoY) was above expectations.
FY15 accounted for 107% of our estimates.
While underlying performance was slightly ahead of expectations, the larger-than-expected capital distribution of 0.332 SGD cts was the key variance.
Management declined to provide guidance on the amount of capital that will be distributed this year. However, it pointed to a significant surplus from the sale of Park Mall and its desire to maintain a stable DPU.
We build in SGD25m of capital distributions into our forecast, which accounts for 10% of our DPU estimates.

Its exposure to the impending office weakness is reduced following the sale of Park Mall for redevelopment.
Including its JV properties and the 30% retained interest in Park Mall, office leases due to expire in FY16/17 is now down to 14.9%/18.9% from 21.4%/19.0% in 30 Sep 2015.
Suntec accounts for the majority of its office space due for renewal. Despite the impending headwinds in the office market, management appears confident of retaining a stable performance at its offices.
We are less optimistic and expect vacancies to trend up in the year ahead.

With commitment levels for Suntec City lifted to 98% (3Q15: 96.4%), its retail segment should reap the full benefits from the AEI in recent years.
27% of its retail space will be renewed this year.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-01-27

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.40 Up 1.33