Simons Trading Research

Author: simonsg   |   Latest post: Fri, 13 Dec 2019, 4:31 PM


Suntec REIT - Enhancing Earnings Quality; Upgrade to BUY

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  • Upgrade to BUY from Neutral, with new SGD 2.08 Target Price from SGD1.90, 8% upside plus 5% yield, as we expect Suntec REIT's earnings turnaround from flow through of positive rent reversions, completion of three development assets by 1H20, and higher income contribution from latest acquisitions.
  • The recent placement exercise also removed an overhang of any imminent fund raising.
  • Valuations are attractive with the stock trading at 0.9x P/BV (Office REITs: -1.1x P/BV) and dividend yield of 5.1%.

Suntec REIT's 2Q Operational DPU in Line

  • Operational DPU rose 1.4% y-o-y, while overall DPU declined 4.6% y-o-y, as Suntec REIT (SGX:T82U) exercised prudence by lowering capital distribution by 35% y-o-y to maintain stable DPU ahead. It still has SGD60m of capital gains left from past divestments.

Suntec City Office and Retail Rents to Continue Uptrend

  • Office leasing picked up pace in 2Q19 with 180,000 sqf of leases signed (~3x more than 1Q19) with rent reversion of +7.9%. With 2H19-2020 expiring rents at

Accretive acquisition of two Australian assets

  • Suntec REIT recently announced the acquisition of 21 Harris Street (21HS) in Sydney (expected physical completion 1Q20, 5.5% initial NPI yield), and 55 Currie Street (55 CS) in Adelaide (8% NPI yield). Both assets are accretive to FY18 DPU assuming a 40:60 (debt:equity) mix. WALE is relatively long at 10.2 years and 4.4 years with built-in annual rent escalations of 3-4%. These acquisitions will be funded from recent private placement proceeds of SGD200m.
  • We are positive on these acquisitions as they should provide much-needed earnings stability. Post acquisition, Australia will account for 23% of AUM. Suntec REIT is expected to focus on overseas acquisitions in the medium term.

Development assets contributions to kick-in from 2H20

  • One of the key drags in Suntec’s earnings has been interest payments for its assets currently under development. The assets – 9 Penang Road (9PR), Olderfleet, and 21HS – are slated for completion by 1H20, and should start positively contributing to earnings, boosting organic DPU.
  • The office component of 9PR has been 100% pre-committed to UBS on a long lease, while Olderfleet has secured commitment for 82.5% of its space with additional heads of agreement signed for 8.4%. This should contribute to healthy organic DPU growth from 2021, aided by built-in rental escalations for these assets.

DPU and Target Price adjustments.

  • Our FY19F-21F DPU are lowered by 2-3%, mainly due to lower capital gains distribution assumed.
  • With better earnings clarity, we cut our COE assumptions by 60bps, resulting in a higher Target Price.


Source: RHB Invest Research - 29 Jul 2019

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Labels: Suntec Reit

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Suntec Reit 1.81 0.00 (0.00%) 7,063 

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