Suntec REIT - DBS Research 2021-09-17: An Underpriced “High Growth” Play

SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - An Underpriced “High Growth” Play

Enhancement of shareholder value through accretive acquisition without EFR is yet to be priced in.
Most undervalued commercial S-REIT with the highest 2-year DPU CAGR, leading its peers.
Attractive acquisition/privatisation target with the potential acquisition ARA Group, given its attractive valuation.

In the recent two acquisitions, Suntec REIT (SGX:T82U)’s management had taken the tough route to deliver inorganic growth without sacrificing shareholder value, which we believe is not appreciated by the market. We view this strategy favourably, as the recent accretive acquisition was made without resorting to an equity fund raise. This helped allay investors perception that Suntec REIT will be forced to tap the market, especially when Suntec REIT's share price is trading at a substantial discount to book. Instead, Suntec REIT decided to utilise debt and perpetual securities to deliver accretive acquisitions while also optimising its capital through asset recycling.

Suntec REIT had made its first foray into the UK office market with its first acquisition, The Nova Properties, in Oct’20 with 4.9% DPU accretion based on pro forma estimates. In less than a year, Suntec REIT acquired The Minster Building, another prime London office in Jun’21 with 3.6% DPU accretion based on pro forma estimates.

Suntec REIT has also crystalised value through the sale of its stake in 9 Penang Road and strata units at Suntec City Office Tower for a collective S$1.2bn, both at above latest valuations. The assets were divested at 3.3% and 3.1% yields respectively. Funds were likely redeployed to its recent higher-yielding acquisitions, coupled with potential top-up to DPU to support distributions as the manager navigates through the pandemic and most recently the emerging risk caused by the Delta variant.

Despite reopening having slowed following the resurgence of the Delta variant, we estimate that Suntec REIT is positioned to deliver strong FY22F growth led by full-year contribution from recent accretive acquisition and recovery from the progressive ongoing reopening. Our estimates forecasts ~20% y-o-y growth in Suntec REIT's FY22F DPU (core DPU FY22F +9% y-o-y) and two-year CAGR of 12% from FY20 to FY22F. If reopening progresses as planned, we estimate core DPU could surpass pre- COVID levels, at ~S$0.09 DPU in FY23F.
Most undervalued commercial S-REIT trading at -0.5 standard deviation while earnings lead recovery amongst peers. Despite Singapore having been progressively reopening following the Circuit Breaker, Suntec REIT's share price has lagged its commercial peers and is currently the most undervalued commercial S-REIT. Suntec REIT is currently trading at 0.7x P/NAV, below -0.5 standard deviation of its historical range, while its peers are trading between 0.8x to 1.2x P/NAV.
Suntec REIT’s two-year DPU CAGR of 12% leads its commercial S-REITs’ peers at an average of 5%. Given the projected growth in FY22F, Suntec REIT’s dividend yield ranks the highest at 6.5%, while peers are trading at an average of 5.7% FY22F dividend yield.

With the recent announcement of the potential acquisition of ARA Group, we believe that Suntec REIT could be an attractive acquisition/privatisation target given the attractive valuation. The new merged entity with ARA Group with a focus on new economy assets could drive potential portfolio optimisation post the merger.
In fact, Business Times recently reported that ARA Asset Management divested 61 Robinson Road for S$422m to a home-grown private equity fund management group Rivulets Investments for S$422m despite the ongoing M&A transaction. The price implies a ~3.3% yield, S$2,973 psft.
However, in our view, the plausible strategy moving forward for Suntec REIT could be having a new strategic investor with funding and pipeline support for Suntec REIT to grow in the future. We believe the introduction and strength of a new strategic investor could be the next catalyst for Suntec.

We maintain our BUY rating on Suntec REIT and raised our target price to S$1.90, pricing in the recent asset recycling and rolling forward our DCF. We lower our FY21F-FY22F DPU estimates by 3% to 12% mainly due to extending the capital distributions from FY21F to FY22F and to factor in the recent tightening of measures and slow progress of reopening in Singapore.
We believe the recent weakness in Suntec REIT's share price following concerns over the Delta variant slowing reopening globally could be a good entry opportunity, to be positioned from the eventual return to normalcy. In addition, Suntec REIT’s Australia and UK portfolio rental income are partially supported by rental support/guarantee that would provide earnings visibility in the near term as reopening slows down.
See

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-09-17

SGX Stock Analyst Report BUY MAINTAIN BUY 1.90 UP 1.850