Suntec REIT (SUN SP) - Maybank Kim Eng 2017-10-27: Acceleration In Footfall At Suntec City Mall

Suntec REIT (SUN SP) - Maybank Kim Eng 2017-10-27: Acceleration In Footfall At Suntec City Mall SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT (SUN SP) - Acceleration In Footfall At Suntec City Mall


Maintain HOLD; Peak valuation justified by bottoming office market 

  • 3Q17 was in line at 75% of our full-year estimates. 
  • Stronger operational performance at Suntec City Mall was a key positive with near full occupancy and acceleration in footfall. 
  • We raise FY17-19E DPU by < 1%. We roll forward our valuation basis and raise our TP to SGD1.84, based on a target yield of 5.25% (from 5.5%)
  • The narrower yield target reflects a more resilient operational performance and is in line with our valuation basis for Keppel REIT. Prefer CapitaLand Commercial Trust CCT for sector exposure. 


Results in line; DPU dipped on enlarged share base 

  • Despite a 2.4% YoY increase in distributable income, DPU dipped by 2.1% due to an enlarged share base after the CB conversions that took place in May. However, this also led to a 100bps YoY improvement to its gearing ratio. 
  • The slight dip in contribution from its ORQ and MBFC JVs is not a concern as it was off a higher base with one-off items. 
  • Nonetheless, we noticed a 6.5ppt dip in occupancy at Marina Bay Link Mall to 93%, which may have made a small dent to its underlying income. 


Resilience at Suntec City Mall; Stronger footfall 

  • Amidst the ongoing retail headwinds, operational performance at Suntec City Mall was more resilient than expected. Committed occupancy was robust at 99.3%, which is a marked improvement from 98% at start of the year. 
  • Footfall at the mall accelerated with shopper traffic improving to 12.2% YoY in 9M17 (vs 11.0% in 1H17, 7.3% in 1Q17). Growth in tenant sales is tracking 5% YoY. 


Consultants flagged a slight uptick in Grade A rents 

  • Preliminary data from CBRE showed a slight 1.7% QoQ increase in Grade A rents in the quarter to SGD9.10 psf. While the office market has clearly bottomed, near-term upside to rents could be limited as vacancy levels remain high. 
  • Nonetheless, with 18%/15% of office leases up for renewal in 2018/19, a stronger-than-expected pick up in the office market could present upside risk to earnings. 


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/ 2017-10-27
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.800 Same 1.800



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