Suntec REIT - DBS Research 2016-04-22: Riding through rising headwinds

Suntec REIT - DBS Research 2016-04-22: Riding through rising headwinds SUNTEC REIT SUNTEC REAL ESTATE INV TRUST T82U.SI 

Suntec REIT - Riding through rising headwinds 

  • 1Q16 results in line 
  • Potential downside to rental reversions at phase 1 of Suntec City Mall 
  • Contribution from 177 Pacific highway to drive medium-term earnings 

Hemmed in by double headwinds 

  • In the year ahead, the REIT’s earnings will be driven by new contribution from recently completed Suntec City Mall redevelopment. 
  • Due to headwinds in the retail sector however, we believe that earnings upside is capped as the mall’s rents have underperformed the Manager’s initial target. 
  • In addition, there could be downside risk for the REIT’s office assets, which are expected to see some volatility in rents and occupancies when new office supply enters the CBD from 2016 onwards. 
  • As such, we maintain our HOLD call, TP of S$1.58. 

Weak retail outlook to cap upside from AEI 

  • Completed in Jun-13, assuming a typical 3-year lease cycle, tenants at phase 1 of the mall will be entering their first reversionary cycle in 2016. 
  • We understand that rental reversion trends have remained mix, given the weak operating climate. The Manager is looking to potentially tweak the tenant mix going forward. 

Secure income contribution from Australian asset from FY16 onwards. 

  • Suntec REIT is expected to complete the acquisition of 177 Pacific Highway in 2H16 which will add geographic diversification to its portfolio. 
  • Upon completion of the office property in early 2016, Leighton Holdings will take up 76% of the NLA for an approximate lease period of 10 years and thus lengthen the REIT's lease profile and add income visibility. 


Valuation: 


Maintain HOLD, TP S$1.58 

  • We have a HOLD recommendation on Suntec REIT, with a TP of S$1.58. 
  • Dividend yield of c.5.8-6.0% over FY16-17F is fairly attractive, but total returns to our TP is insufficient at < 10%. 

Key Risks to Our View: 


Upside risk stemming from distributions from capital 

  • The Manager has indicated a willingness to use proceeds to mitigate the decline in DPU after the divestment of Park Mall. 
  • Additional capital distributions to support dividend to shareholders will present upside to our estimates.


 
Derek Tan DBS Vickers | Mervin Song DBS Vickers | http://www.dbsvickers.com/ 2016-04-22
DBS Vickers SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.58 Same 1.58


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