Suntec REIT - CIMB Research 2017-07-26: Priced In

SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Priced In

Suntec REIT's 1H17 DPU of 4.918 Scts was in line, making up 49% of our FY17F forecast.
Higher Australia contributions offset the weaker Singapore performance.
Adopting office tenant retention strategy, continues to right-size retail mix.
Strong balance sheet with visible growth pipeline.

Valuations not compelling; retain Reduce rating; our Target Price rises to S$1.77 due to inclusion of Olderfleet project.

Suntec reported a 2Q17 distribution income of S$66m, +4.3% yoy. This includes a capital distribution of S$8m, similar to the level a year ago. Excluding this, the bottom line would have improved 4.9% yoy.
However, 2Q17 DPU of 2.493 Scts was -0.3% yoy due to dilution from an additional 95.7m new units issued for conversion of its CBs.
1H17 DPU of 4.918 Scts was in line with expectations, making up c.49% of our FY17F forecast.

The better operational performance was due to higher income from 177 Pacific Highway and Southgate Complex in Australia. This helped to offset lower contributions from the MBFC properties, due to negative rental reversion and poorer retail rental contributions.
Although Suntec Mall saw an 11% yoy jump in footfall and 5.3% yoy higher tenant sales, the expiry of higher rents contracted 3 years ago resulted in a decline. As for the office segment, it renewed/leased 118k sf in 2Q, with a 74% tenant retention ratio.

Suntec has another 3.8% of office and 8.8% of retail leases expiring in 2H17, followed by a further 20.5% of office and 21.9% of retail leases in FY18. The trust will continue to adopt a tenant retention strategy for its office portfolio, which accounts for c.60% of total 2Q17 NPI. It is currently in final negotiations for about one-fifth of the office leases due in 2018.
Meanwhile, we expect retail rent performance at Suntec Mall to remain sluggish as management continues to right-size its tenant mix and shop sizes in the near term.

Suntec announced it has acquired a 50% stake in Olderfleet, located at 477 Collins St, Melbourne, for A$414.7m. Expected to complete by mid-2020, the premium office tower is set to have 58,000sqm of lettable area, of which 39.1% has already been pre-leased.
Initial NPI yield is 4.8% with annual rental escalations of 3.5-3.75% and also a 4.8% coupon on progress payment during the development period.
In addition to extending its office portfolio WALE to 4.23 years, the share of income could lift DPU by c.1.8% p.a.

In the medium term, Suntec has the option to buy an additional effective 25% stake in the Southgate Complex development in Melbourne and potentially one of the office towers post the redevelopment of 9 Penang Rd. These, together with payment for the Olderfleet project, could raise aggregate gearing from the present 36.1% to c.42%.
The 2Q balance sheet remains robust, with debt maturity extended to 2.96 years and 65% of its debt hedged.

We cut our FY17-19F DPU estimates by 0.7-1.85% to factor in dilution from new units issued. After adjusting for the acquisition of the Olderfleet development project, our DDM-based TP rises to S$1.77.
While we note Suntec City Mall appears to be stabilising, with higher shopper footfalls and tenant sales, and there is acquisition growth potential, at 5.2% FY17F DPU yield, valuations appear elevated. As such we retain our Reduce rating.
Upside risks could come from faster-than-expected stabilisation of retail assets.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-07-26

CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 1.77 Up 1.730