Suntec REIT - DBS Research 2016-08-10: Stable DPU but upside capped for now

Suntec REIT - DBS Vickers 2016-08-10: Stable DPU but upside capped for now SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Stable DPU but upside capped for now

  • Acquires 25% stake in Southgate mixed office/retail property in Melbourne for A$154.9m.
  • Premium valuation for prime asset and timely acquisition to mitigate weakness in Singapore.
  • Stable DPU ahead. 



Range bound for now. 

  • We maintain our HOLD call with a revised TP of S$1.71. We believe Suntec’s share price will be range bound in the near term due to headwinds in the retail sector, which will likely cap its earnings as Suntec 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.


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 Suntec 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.


But expect stable DPU achieved through increased contribution from Australian assets and capital distributions. 

  • Despite potential downside risk to earnings at Suntec’s Singapore properties, we expect a stable DPU profile going forward. This will be achieved through 
    1. increased earnings contribution from the completion of 177 Pacific Highway (Sydney) project in 2H16 and the recent acquisition of a 25% stake in the Southgate Complex in Melbourne, and 
    2. payout of proceeds from the disposal of Park Mall.


Valuation

  • As we impute the recent Southgate acquisition, our DCF-based TP edges up to S$1.71 from S$1.70.


Key Risks to Our View

  • Upside risk from acquisitions and better rental performance.
  • The key risks to our neutral view are DPU accretive acquisitions and/or better rental performance achieved despite the known headwinds in the Singapore office and retail market.




Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-08-10
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.71 Up 1.700


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