Suntec REIT - DBS Research 2016-07-22: Challenging headwinds

Suntec REIT - DBS Research 2016-07-22: Challenging headwinds SUNTEC REIT SUNTEC REAL ESTATE INV TRUST T82U.SI 

Suntec REIT - Challenging headwinds

  • 2Q16 DPU of 2.50 Scts (flat y-o-y) in line.
  • Negative rental reversions at phase 1 of Suntec City Mall.
  • Lowering our earnings expectations ahead but use of capital distribution to ensure steady DPU profile.



Hemmed in by double headwinds. 

  • In the coming year, Suntec REIT (Suntec)’s earnings will be driven by new contribution from the recently completed Suntec City Mall redevelopment. However, due to headwinds in the retail sector, 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, with revised TP of S$1.70.


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 been mixed, given the weak operating climate. The Manager is looking to potentially tweak the tenant mix going forward.


Secures income contribution from Australian asset from FY16 onwards. 

  • Suntec 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 net lettable area (NLA) for an approximate lease period of 10 years and thus lengthen the REIT's lease profile and add income visibility.


Valuation:

  • As we roll forward to FY17 and impute a lower beta and cost of debt, we raised our DCF-based TP to FY17 to S$1.70 from S$1.58.


Key Risks to Our View:

  • Upside risk stem 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 dividends to shareholders will present upside to our estimates.




Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-07-22
DBS Vickers SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.70 Up 1.58


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