Suntec REIT - RHB Invest 2018-04-25: Progressing Steadily

Suntec REIT - RHB Invest 2018-04-25: Progressing Steadily SUNTEC REAL ESTATE INV TRUST T82U.SI

Suntec REIT - Progressing Steadily

  • Suntec REIT’s operational DPU declined by 5.2% y-o-y in 1Q18, while overall DPU was flat on the back of higher capital distribution.
  • Amidst challenging local market conditions, management has been actively revamping and repositioning its key asset, Suntec City, which we see as a long term positive. The REIT has also been actively expanding its Australian presence, with the market now accounting for ~13% of NPI (from nil prior to 2013).
  • We expect its near term DPU to remain flat but a pick up is expected by end-2020, with contributions from two development properties kicking in. The stock offers FY18F yield of 5.3%, and trades at a P/BV of 0.9x, which we see as fair.
  • Maintain NEUTRAL call and Target Price of SGD1.75 (8% downside).

DPU remained flat while results were in line.

  • Suntec REIT’s gross revenue and NPI for 1Q18 rose by 2.6% and 1.9% y-o-y respectively, due to higher contributions from retail malls and a higher number of convention events. JV contributions were down 9% y-o-y mainly due to the one-off income received from One Raffles Quay in 1Q17. 
  • Interest expense rose 9.4% y-o-y, on the back of higher financing cost (2.73% vs 2.42% in 1Q17). There was a higher capital distribution of SGD6.5m (1Q17: SGD3m), which helped DPU stay flat y-o-y.
  • Overall occupancy declined 0.4ppts q-o-q to 98.4%, due to slightly lower occupancy at its retail malls. 
  • On the positive side, shopper traffic and tenant sales at its Suntec City Mall increased by 12.7% y-o-y and 5.2% y-o-y respectively, indicating better patronage post the recent revamp.

Minimal DPU impact from increased stake in Southgate.

  • Suntec REIT’s stake in the Southgate complex (Southgate) will increase to 50% from 25% by May 2018. This comes after Dexus Trust exercised its put option in February to sell its remaining stake in the building. 
  • The purchase consideration of AUD144.5m is the same as the initial price paid for its existing 25% stake. The acquisition will be fully funded by debt, and is expected to be DPU neutral.

Asset enhancement initiative (AEI) works planned for Suntec City Offices.

  • The asset enhancement work will encompass the upgrading of lift lobbies and washrooms at every level. Works are expected to commence in 4Q18, and be completed by end-2021. We believe the AEI works are timely to fend off increasing competition from newly completed office buildings in the central business district (CBD) and Marina Bay district.
  • Office leasing momentum slowed down during the quarter, with 89,000 sqf of leases signed in 1Q18 (4Q17: 330,000 sqf). Demand came mainly from the consultancy and technology, media and telecommunications sectors. 
  • About 9% of office leases are due for renewal in FY18, of which we expect flat to slightly negative reversions.

Development projects progressing well.

  • Redevelopment works at 9 Penang Road (30% stake, formerly known as Park Mall) is on schedule to be completed by 2019. Over in Australia, 477 Collins Street is now 45.8% pre-committed (with heads of agreement signed for an additional ~9% NLA), ahead of its expected completion in mid-2020. 
  • The higher pre-commitments came after anchor tenant, Deloitte exercised its expansion right for an additional two levels.

Maintain NEUTRAL call with unchanged Target Price of SGD1.75.

  • We expect DPU to remain flat for the next two years. Our DDM-derived Target Price is based on COE of 7.6% and TG of 2%. 
  • Potential catalysts are stronger-than-expected recovery in the Singapore office and retail markets, and accretive acquisitions.

Vijay Natarajan RHB Invest | 2018-04-25
SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.750 Same 1.750