Suntec REIT - OCBC Investment 2021-01-26: Recovery In Sight But High Gearing To Impede Growth


Suntec REIT - Recovery In Sight But High Gearing To Impede Growth

  • Suntec REIT's 2H20 and FY20 DPU fell 12.8% and 22.1%, respectively.
  • Aggregate leverage ratio increased to 44.3%.
  • Uncertainties over Office and Convention businesses while Retail shows green shoots of recovery.

Suntec REIT's FY20 results above our expectations

  • Suntec REIT (SGX:T82U)’s 2H20 gross revenue and NPI fell 12.0% and 10.4% y-o-y to S$165.9m and S$109.0m, respectively, while distribution dipped 12.8% to S$0.04109/unit.
  • For FY20, NPI was down 15.4% to S$199.9m due to lower revenue from Suntec City Mall and Suntec Singapore, but partially offset by contribution from acquisitions.
  • Suntec REIT's FY20 distribution of S$0.07402/unit represented a decline of 22.1%, partly due to the absence of capital distributions (S$26.0m in FY19). Excluding this, DPU still fell 13.6%. Overall FY20 DPU came in 8.4% above our forecast.

Management expecting Suntec City Mall’s revenue to come in within 5-10% of FY19 level in 2021

  • Suntec City Mall recorded negative rental reversions of -1.3% in FY20, as the strong performance in 1Q20 (+16.1%) helped to mitigate weakness for the remaining quarters (-2.4% to -10.8%). Tenant sales and footfall dipped 28% and 50% in FY20, but there was a gradual improvement since Jul (4Q20: -12% and -41%, respectively).
  • Looking ahead, management guided that it expects revenue at Suntec City Mall to improve to within 5-10% of FY19 levels in 2021, supported by an uptick in occupancy from 90.1% to > 95%. However, rental reversions are expected to remain soft, at around the -8% and -12% range.

Convention business to remain a drag, while outlook for Office remains mixed

  • Suntec Convention is expected to continue its struggles in 2021, given continued border restrictions. Management is exploring various strategies on repositioning the Convention space, and it could take 3-6 months to come up with a proper strategy.
  • For Office, Suntec REIT expects consolidation and downsizing of space by some tenants from larger financial institutions and within the shipping, energy and resources sectors. However, this could be offset by expansion from the TMT and Pharmaceutical sectors. Rental reversions in FY21 are expected to remain positive, although the magnitude is likely to be lower than FY20.
  • See Suntec REIT Share Price; Suntec REIT Target Price; Suntec REIT Analyst Reports; Suntec REIT Dividend History; Suntec REIT Announcements; Suntec REIT Latest News.
  • We believe the outlook for office remains uncertain over the medium-to-longer term given work from home trends. We lower our terminal growth assumption from 1.5% to 1.25% given uncertainties over its Office and Convention businesses, while aggregate leverage of 44.3% is well above the industry average and could curtail future DPU growth, in our view. But as we also increase our AUD to S$ assumptions and roll forward our valuations, our fair value estimate for Suntec REIT rises from S$1.57 to S$1.59.

OCBC Research Team OCBC Investment Research | 2021-01-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.59 UP 1.570