Suntec REIT (SUN SP) - Maybank Kim Eng 2017-01-25: Fresh Disclosures by New CEO

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SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT (SUN SP) - Fresh Disclosures by New CEO

Maintain HOLD; cut DPU slightly 

• 4Q16 DPU was in line, with FY16 DPU at 99% of our FY16E. 
• For FY17-18, we trim DPU by 1% to incorporate lower rents at its JV assets. 
• New CEO expressed a desire to improve investor communication. More colour was provided for Park Mall’s redevelopment. 
• Maintain HOLD in view of limited near-term catalysts. Our TP dips to SGD1.76 from SGD1.77 after our DPU adjustments, still based on our yield target of 5.5%. 
• CCT (BUY, TP SGD1.81) is our preferred sector exposure as its lower proportion of 2017 lease expiries and longer WALE should provide better income stability.
• Downside risks to our view on SUN include sharper-than-expected declines in office rents and overpaying for acquisitions.

Better disclosures 

• Management provided fresh disclosures on the underlying performance of its assets and updated on Park Mall’s redevelopment. Except for a higher valuation for recently-completed 177 Pacific Highway, property valuations were largely unchanged. 
• Suntec City mall is stabilising with committed rents little changed at SGD11.20 psf. Occupancy improved 1.1ppt in 4Q to 97.9%.

New CEO’s comments 

• Mr Chan Kong Leong took over as CEO of the REIT manager and addressed the sell-side community for the first time in his new capacity. He spent the bulk of his career at CapitaLand with a focus on its retail business before joining as COO last year. 
• He aims to improve investor communication and seeks to improve asset yields. He shared that 9 Penang Road - Park Mall’s redevelopment - would cost SGD800m to build.
• It would have 352k sf of office space and 15k sf of ancillary retail space with an estimated GDV of SGD935m on a 100% basis.

Cheap vs physical; higher vacancy risks than peers 

• As with its peers, implied values for SUN’s office assets are undemanding against the physical market. Asia Square Tower 1 was sold for SGD2,704 psf last year. Five office floors at Suntec Tower One were recently sold by BASF for SGD2,400 psf. 
• Nonetheless, we still deem CCT a better proxy for this pricing mismatch due to its lower vacancy risks than SUN.

Swing Factors

Upside

• Appreciation in capital value of its properties.
• Stabilisation of retail market.
• Earlier than expected rebound in office rents.

Downside

• Sharper than expected declines in office rents or occupancy.
• Overpaying for acquisitions.
• Cost overruns in Park Mall redevelopment.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-01-25

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.760 Down 1.770