Suntec REIT - RHB Invest 2019-06-20: Awaiting Australian Acquisition; NEUTRAL


Suntec REIT - Awaiting Australian Acquisition; NEUTRAL

  • Maintain NEUTRAL, SGD1.90 Target Price, 1% downside with 5.3% FY19F yield.
  • Suntec REIT (SGX:T82U)’s recent placement exercise gears up its balance sheet for potential acquisitions, but is dilutive to unitholders in the near term. While operational weakness is expected to persist in the near term, a turnaround is expected in 2H20 post-completion of its development projects.
  • Valuations are reasonable, at 0.9x P/BV with a FY19F dividend yield of 5.3%. We maintain our call pending deployment of proceeds.

Placement proceeds of SGD200m to further build its Australian presence.

  • In May, Suntec REIT (SGX:T82U) completed a private placement of 111.1m new units, raising gross proceeds of SGD200m. The proceeds will mainly be used to fund potential acquisitions of properties in Australia, which are currently undergoing due diligence.
  • Suntec REIT currently has three assets (including one under development) in Melbourne and Sydney, which account for ~15% of total NPI. Management previously noted that it will look for opportunities to acquire good-quality assets in the suburban markets of Sydney and Melbourne, and the core-CBD market for other key cities in Australia.
  • With the transaction yield of Australian commercial assets ranging 4.5-6.5%, we expect the acquisition – if completed – to be yield-accretive to unit holders.

UBS leasing of 9 Penang Road a positive development.

  • In April, Suntec REIT announced that its upcoming development 9 Penang Road’s office space (NLA: 381,000 sqf) has been fully pre-leased to UBS for the long term. Suntec REIT has a 30% stake in the development, and is in advanced discussions for leasing the remaining 15,000 sqf of retail space.
  • We estimate average committed rental rates to be in high single digits (~SGD9 psf) which translates to a yield-on-cost of around 4%. The project, now 81% complete, is on track to be done by the year-end, with targeted occupation by 2H20.

Operational turnaround expected in 2H20.

  • With two of its seven Suntec City Offices undergoing asset enhancements, we expect operational weakness (which will impact DPU) to persist until Australia has been healthy heads of 13%. The building is on by mid-2020.
  • The extensive refurbishment works on DPU upon completion of the above, which should help in organic DPU growth from 2021 onwards.

DPU adjustments.

  • We adjust FY19-21F DPU by -1 to +2%, factoring in recent placement exercises and contributions from development assets.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-06-20
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.900 SAME 1.900