SINGAPORE (Jul 1): RHB analyst Vijay Natarajan is maintaining his “buy” call on Suntec REIT with an unchanged target price of $1.78, which represents a 26% upside on the stock.

The recommendation comes on the back of expected improved organic income from 2H due to the REIT’s newly completed developments, as well as an attractive valuation.

“Suntec REIT remains our preferred office/retail pick on valuation grounds and expected improvement in operational numbers,” noted Natarajan in a report on Wednesday.

The REIT currently has a capital gain balance of $46 million with an expected yield of 6%, and is trading at an “attractive valuation” of 0.66 times price-to-book value (P/BV), which is a 17% discount compared to its sector peers, notes Natarajan.

In addition, one of its major shareholders, the family of Gordon Tang, increased its stake to 8% through open market purchases in May. 

Citing its prudent use of capital top-ups and a lack of direct sponsor pipeline, Natarajan notes that Suntec, a wholly-owned subsidiary of ARA Asset Management Limited, has proved its ability to grow “by leveraging on ARA’s network and track record” over the years.

He notes that Suntec REIT’s management has provided two months’ rental rebates for retail tenants in April and May. Coupled with support from the government, tenants will receive four months in rebates, plus cash flow assistance by drawing on security deposits. 

“We don’t expect any significant impact from mandatory one-month base rent relief for qualifying SME tenants under the new framework.”

Most tenants will weather the storm, as less than 1% of tenants are expected to terminate their leases prematurely. Nevertheless, management anticipates headwinds for Suntec City mall, with occupancy levels “expected to trend to [a] low [of] 90% from a current high [of] 98% on potential non-renewals”. 

To reduce operating costs, the Suntec Singapore Convention and Exhibition Centre will remain closed until Aug 2. 

Contributing some 70% of the company’s income, Suntec REIT’s office portfolio is expected to remain resilient, with office occupancy in 1Q staying high at 98.8% and only 8.6% of leases pending renewal this year. 

Suntec REIT leased 133.9k sq ft of office space in 1Q20, of which 42% are new leases.

While some 29% of its leases are up for renewal in FY21, the expiring rents for FY21 are 10-20% below 1Q market rents. “Rent reversions in 1Q were healthy at 13% and management expects this trend to continue,” noted the report. 

Apart from its eponymous spaces, Suntec REIT expects greater income in 2H20 from its new development project in 9 Penang Road, of which it has a stake of about 30%, as well as from its Australia projects: Olderfleet in Melbourne and 21 Harris Street in Sydney. 

In January, Natarajan projected that the three assets will contribute close to $30 million in net income for 2020F. 

“The high occupancy levels and long WALE (weighted average lease expiry) of these projects offer income certainty,” noted the report. 

Natarajan has trimmed Suntec REIT’s distribution per unit (DPU) by 8% to 7.8 cents for FY20F by mainly removing capital top-ups assumed. He has also increased the REIT’s FY21-22F DPU by 1-2%.

As at 1.45pm, units in Suntec REIT are trading 1 cent higher, or 0.71% up, at $1.42.