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

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 

Maintain SELL; 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. 

Larger-than-expected capital distributions 

  • 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. 

Suntec accounts for majority of office expiry 

  • 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. 

Retail to reap full benefits of AEI 

  • 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 | 2016-01-27
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.40 Up 1.33