Suntec REIT - RHB Invest 2020-07-02: Expecting A Better 2H; Keep BUY

SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - Expecting A Better 2H; Keep BUY

Suntec REIT remains our preferred office/retail pick on valuation grounds and expected improvement in operational numbers.
Office portfolio (c.70% of income) is expected to remain resilient while the impact on the retail portfolio is partly mitigated by the strategic location of its malls. With recent completion of development assets, organic income is set to improve from 2H onwards.

Suntec REIT (SGX:T82U)’s P/BV of 0.66x is at c.17% discount to sector peers (See Figure2 in PDF report attached below for Office and Retail S-REITs peer comparison). This valuation gap is probably due to two reasons:
- a lack of sponsor pipeline and
- use of capital top-ups to boost DPU.
On the acquisition front, despite a lack of direct sponsor pipeline, Suntec REIT has proved over years its ability to grow, by leveraging on ARA’s network and track record. Suntec REIT has been largely prudent in using capital top-ups mainly as a bridge to offset the lack of income contribution from assets under development.
We also note that one of its major shareholders, Gordon Tang’s family members (c.8% stake), increased its stake through open market purchases in May.

Office occupancy during 1Q remains high at 98.8% with only 8.6% of leases pending renewal this year. Although in FY21 it has c.29% of leases up for renewal, the expiring rents for FY21 are 10-20% below 1Q market rents.
Suntec REIT's rent reversions in 1Q were healthy at 13% and management expects this trend to continue. Management expects < 1% of early terminations from tenants impacted by COVID-19.
We don’t expect any significant impact from mandatory 1-month base rent relief for qualifying SME tenants under the new framework.

Management has provided two months’ rent rebates for retail tenants (Apr and May) and, including Government support, tenants will receive a total of four months in rebates. In addition, tenants are also provided cash flow assistance by drawing down on security deposits.
Despite such assistance measures, management anticipates headwinds for Suntec City mall, with occupancy levels expected to trend to low 90% from a current high 98% on potential non-renewals. However the strong positive rent reversions seen in the last few quarters should mitigate some of the weakness.
Suntec Convention Centre will remain closed until 2 Aug to reduce operating costs.

9 Penang Road (9PR, 30% stake), Olderfleet and 21 Harris Street will commence contributions in 2H with tenants moving in. The high occupancy levels and long WALE of these projects offer income certainty.

We lower our Suntec REIT's FY20F DPU by 8% by mainly removing capital top-ups assumed, and tweaked up our FY21-22F DPU by 1-2%.
BUY with unchanged Target Price of SGD1.78, 26% upside and c.6% yield.
Suntec REIT currently has a capital gain balance of SGD46m.
See Suntec REIT Share Price; Suntec REIT Target Price; Suntec REIT Analyst Reports; Suntec REIT Dividend History; Suntec REIT Announcements; Suntec REIT Latest News.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-07-02

SGX Stock Analyst Report BUY MAINTAIN BUY 1.780 SAME 1.780