Suntec REIT - OCBC Investment 2018-01-25: Flat Performance, Rich Valuations

SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Flat Performance, Rich Valuations

Suntec REIT reported an in-line set of 4Q17 results. Gross revenue and NPI declined 1.8% and 2.2% y-o-y to S$87.3m and S$59.4m, respectively. This was attributed to lower revenue from Suntec Singapore and its office portfolio, but partially offset by higher retail income from Suntec City Mall.

DPU improved 0.3% y-o-y to 2.604 S cents, boosted by a 19.7% increase in distribution from capital.
For FY17, Suntec REIT’s gross revenue jumped 7.8% to S$354.2m and met 100.3% of our forecast. DPU for the full-year came in flat at 10.005 S cents, or 100.1% of our projection.

Overall portfolio occupancy was at 99.2% for Office and 98.8% for Retail. There was an increase in valuation for a number of its assets including Suntec City Mall (+0.2%), 177 Pacific Highway (+9.4%), Suntec Convention (+3.0%) and Southgate Office (+10.4%).
Average rents of S$8.50 psf/month and S$8.03 psf/month were secured for its Singapore office portfolio and Suntec City office, which was lower by 1.3% and 3.8% q-o-q, respectively. For the latter, the dip was partly due to two anchor tenants which typically command lower rentals on a psf basis. Excluding these two tenants, rental reversions were down ~5% in FY17.
On the retail front, Suntec City Mall registered healthy growth in footfall (+12.8%) and tenants’ sales psf (+4.8%) for FY17. Occupancy cost for Suntec City mall was 22-23%. Management believes there is room to lower this by bringing in stronger tenants, reducing poor performing tenants, and helping existing tenants to improve.
Whilst the outlook has improved, we are still expecting some challenges in the near-term.

We incorporate this latest set of full-year results in our model, and roll forward our valuations. This results in a marginally higher fair value estimate of S$1.81 (previously S$1.80).
Based on our forecast, Suntec REIT is trading at a distribution yield of 4.7% for FY18F, which comes in approximately 2.2 standard deviations below its 5-year mean of 5.7%. We opine that valuations are rich at this juncture, and believe the markets have more than priced in a strong recovery in Singapore office rentals.
Downgrade Suntec REIT to SELL from Hold.

Wong Teck Ching Andy CFA OCBC Investment | http://www.ocbcresearch.com/ 2018-01-25

OCBC Investment SGX Stock Analyst Report SELL Downgrade HOLD 1.81 Up 1.800