Suntec REIT (SUN SP) - Maybank Kim Eng 2017-12-15: Upside To Asset Values

Suntec REIT (SUN SP) - Maybank Kim Eng 2017-12-15: Upside To Asset Values SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT (SUN SP) - Upside To Asset Values


Expect positive revaluations; Maintain HOLD 

  • We believe Suntec REIT's portfolio could be revalued higher at the end of the financial year. 
  • While book values will probably be lifted, asset management fees could also increase resulting in a negative impact on DPUs. With a stronger operating performance at Suntec City Mall over the past year, its retail business could surprise to the upside. 
  • We raise FY18/19E DPU by +2.3%/3.4% to incorporate higher market rents for offices and lift TP 3% to SGD1.89, based on a target yield of 5.25%, to reflect our relative preference within the sector. This is close to its historical low and reflects our view of a potential rebound in the office market. 
  • Maintain HOLD.


Negative reversion for at least one more year 

  • With vacancies still high and plenty of secondary space surfacing in the year ahead, we doubt office rents can rally enough to clear 2015 levels next year. This implies that rental reversions should stay negative in 2018 considering the typical lease tenure of three years. As such, we expect underlying income to remain under pressure.


Unsure if a potential increase in asset values will be taken positively 

  • We believe there could be upside to the valuation of Suntec REIT's portfolio at the end of the financial year. 
  • While the Marina Bay Financial Center (MBFC) properties are held on the book of Hongkong Land (HKLD SP) at a cap rate of 3.25%, they are currently valued using a cap rate of 3.75% on Keppel REIT and Suntec REIT's books. This implies that there could be a revaluation boost from a tighter cap rate. 
  • Furthermore, the strong land bid for the Beach Road site opposite Suntec also suggests higher replacement cost for the property. 
  • Although book values will be lifted, asset management fees (0.3% of asset value + 4.5% of NPI) that will be paid to its managers will also increase with a negative impact on DPUs.


Retail could surprise 

  • We noticed an improvement in the performance of the Suntec City Mall over the past year. Footfall improved by +12% YoY in 9M17 and occupancies held up well, despite a tough market. With management putting more emphasis on active asset management, we believe this business segment could surprise to the upside.


Swing Factors


Upside

  • Appreciation in the capital value of its properties.
  • Stabilisation of the 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/ 2017-12-15
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.89 Up 1.84



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