Suntec REIT - CIMB Research 2018-04-25: Improved Retail And Convention Performance

Suntec REIT - CIMB Research 2018-04-25: Improved Retail And Convention Performance SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Improved Retail And Convention Performance

  • Suntec REIT's 1Q18 DPU of 2.433 Scts is in line with expectations, at 24% of our FY18F forecast.
  • High office occupancy.
  • Strong operational performance from Suntec Mall.
  • Gearing at 36.6%, visible growth pipeline.
  • Upgrade to ADD from Hold on valuations, Target Price lowered slightly to S$2.12.

1Q18 results summary

  • Suntec REIT reported a 1Q18 gross revenue of S$90.7m, +2.6% y-o-y, led by greater retail and convention contributions, while distribution income rose 4.8% y-o-y to S$64.8m with the inclusion of a higher S$6.5m of capital top-up. 
  • DPU of 2.433 Scts is 0.3% higher y-o-y.

High office portfolio occupancy

  • Office revenue declined 4.6% y-o-y due to frictional downtime from replacement leases. Portfolio occupancy was relatively stable q-o-q at 99.1%. Suntec REIT renewed/leased 89,000 sq ft of office leases in 1Q18, of which 28% are new leases. Singapore demand came from consultancy and TMT sectors. 
  • Average Singapore reversion rents achieved was higher q-o-q at S$8.95psf. There is a remaining 9% of NLA to be renewed for 9M18.

Stabilising retail earnings

  • Suntec REIT signed 61,000 sq ft of retail leases in 1Q18 with a retention rate of 71%. Suntec City Mall committed occupancy stands at 98.6% while shopper traffic and tenant sales expanded 12.7% and 5.2% y-o-y respectively. More conveniences were put in place to enhance shopper experience, such as navigation initiatives and value-added services (including concierge services). 
  • The trust will continue to improve asset utilisation and tenant right-sizing as part of its move to strengthen its retail offerings.

Visible acquisition growth

  • In the medium term, inorganic growth would provide another earnings driver. The purchase of another effective 25% stake in Southgate Complex in Melbourne is expected to be completed in May 18 and should boost 2H18 earnings. 
  • In the longer run, potentially one of the office towers of 9 Penang Rd could be acquired post redevelopment in 2019. 
  • Suntec REIT’s balance sheet remains healthy at 36.6% geared at end-1Q18 and provides the trust headroom to pursue acquisition growth.

Upgrade on valuations, watch for entry points

  • We tweak down our FY19-20F DPU estimates marginally post results. Suntec REIT’s share price has retraced by 12% since Jan this year. At the current share price, the stock is showing some value, trading midway between its long-term average and +1s.d. forward yield range and amid a stabilising retail leasing earnings outlook. Hence, we upgrade our call to ADD on valuation grounds with a slightly lower DDM-based Target Price of S$2.12. 
  • Given the current volatile markets, we believe a good entry point would be closer to its long-term average level i.e. closer to the S$1.80 mark.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | 2018-04-25
SGX Stock Analyst Report ADD Upgrade HOLD 2.12 Down 2.170