Suntec REIT (SUN SP) - Maybank Kim Eng 2018-01-24: Retail Re-jig A Theme To Watch

Suntec REIT (SUN SP) - Maybank Kim Eng 2018-01-24: Retail Re-jig A Theme To Watch SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT (SUN SP) - Retail Re-jig A Theme To Watch


Maintain HOLD; Better value in developer landlords 

  • FY17 in line. While rental reversions for its offices could remain negative in 2018, the magnitude of weakness should be less with the stronger office sentiment. 
  • Operating metrics at Suntec City Mall continue to improve and we believe its ongoing re-jig is a theme to watch in the medium term. We raise FY18/19E DPU by 1% mainly to reflect slightly better signing rents at Suntec City Offices. Consequently, our Target Price is lifted marginally to SGD1.91, based on unchanged target yield of 5.25%. 
  • With total return of -7%, maintain HOLD. For exposure to Singapore’s recovering office market, we see better value in developer landlords with large prime office exposure (UOL and GuocoLand).



Stable DPU 

  • FY17 DPU was in line at 98% of our estimate. Management reiterates its commitment to a stable DPU with capital distributions from earlier divestments. 
  • While the strong share price performance of Suntec REIT has clearly lowered its cost of equity, management does not see a need to raise equity without sizeable acquisitions.


Office reversions could improve in 2018 

  • Signing rents at Suntec City Offices dipped to SGD8.03 psf (3Q17: SGD8.35) due to lower rents negotiated by two large anchor tenants. Excluding these, signing rents for the remaining space were above SGD9 psf. Overall, rental reversion at this property was negative 5% for FY17.
  • With improving office sentiment, management guides for smaller negative reversion of 1% in 2018. It also announced a 3-year asset enhancement initiative costing SGD48m to improve its competitiveness.


Retail re-jig a work-in-progress 


  • The ongoing re-jig at Suntec City Mall is a theme that has been playing out since retail veteran Mr. Chan Kong Leong joined as CEO. Operating metrics at the mall have been improving with footfall and tenant sales rising by 12.8% and 4.8% y-o-y in 2017. This compares favourably against the 0.3% dip in shopper traffic and flat tenant sales for its largest peer CapitaLand Mall Trust. 
  • Management sees potential to right size another 20-30% of its retail space to improve its underlying performance.




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/ 2018-01-24
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.91 Up 1.890



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