Suntec REIT - DBS Research 2017-01-26: Early signs of improvement

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SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Early signs of improvement

• 4Q16 DPU down 6% y-o-y but FY16 DPU flat y-o-y.
• Suntec Mall showing some early signs of improvement with foot traffic up 16% y-o-y.
• Announces details of S$800m redevelopment of Park Mall with prospects to acquire another 25% interest in Southgate.

Range bound for now. 

• We maintain our HOLD call with a revised TP of S$1.75. 
• We believe Suntec REIT’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 2017 onwards.

Weak retail outlook near term but upside potential visible. 

• While Suntec Mall is showing signs of improvement with 2016 foot traffic up 16% y-o-y and current passing rents relatively low at S$11.20 per square foot (psf) per month, we believe the current weak operating climate will likely cap the ability of Suntec to drive rents significantly in the near term. 
• However, as Suntec further tweaks its tenant mix and demonstrates healthy tenant sales growth, there is significant upside over the medium term.

Stable DPU through increased contribution from Australian assets and capital distributions. 

• Despite potential downside risk to earnings at Suntec REIT’s Singapore properties, we expect a stable DPU profile going forward. This will be achieved through 
  1. full year contribution from 177 Pacific Highway (Sydney), 
  2. the recent acquisition of a 25% stake in the Southgate Complex in Melbourne with the potential to further add another 25% interest in 2H17, and 
  3. payout of proceeds from the disposal of Park Mall.

Valuation

• After incorporating the purchase of another 25% interest in Southgate and redevelopment of Park Mall, we raised our DCF-based TP to S$1.75 from S$1.71.

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 headwinds in the Singapore office and retail market.

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-01-26

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.750 Up 1.710