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Does Suntec REIT's rally have legs?

Michelle Zhu
Michelle Zhu1/25/2018 11:02 AM GMT+08  • 4 min read
Does Suntec REIT's rally have legs?
SINGAPORE (Jan 25): DBS Vickers Securities is reiterating its “buy” call on Suntec REIT with an unchanged target price of $2.30 after its manager on Wednesday posted a 4Q distribution per unit (DPU) of 2.604 cents, in line with expectations.
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SINGAPORE (Jan 25): DBS Vickers Securities is reiterating its “buy” call on Suntec REIT with an unchanged target price of $2.30 after its manager on Wednesday posted a 4Q distribution per unit (DPU) of 2.604 cents, in line with expectations.

See: Suntec REIT 4Q DPU holds steady at 2.604 cents

In a Thursday report, DBS lead analyst Mervin Song opines that the REIT’s unit price rally has more to go from its current level, as he now has greater confidence in the ability of Chan Kong Leong, CEO of the manager, to engineer a turnaround at Suntec City Mall.

This comes after Chan accomplished a deep dive into Suntec mall and identified easy wins to improve the mall’s performance, in Song’s view.

The analyst also argues that REITs with office exposure, such as Suntec REIT, should trade above book value with a multi-year upturn in Singapore office rents on the horizon.

“Over the years, there has been speculation of Suntec being privatised by Suntec’s sponsor, ARA Asset Management and its partners. While we are not privy to ARA’s intentions, we believe with ARA, now backed by Warburg Pincus/Avic Trust, has the resources to privatise Suntec if the market undervalues Suntec,” notes Song.

“Assuming an offer price at our TP of $2.30, we estimate ARA could generate an internal rate of return (IRR) of 10%. Thus, we believe this takeover risk should result in a firm Suntec share price going forward,” he adds.

Following Suntec REIT’s 4Q results, CIMB Research has upgraded the trust to “hold” from “reduce” on stabilising revenue outlook, while raising its target price to $2.17 from $1.83 previously as it rolls forward its assumptions.

The research house’s lead analyst Lock Mun Yee highlights narrowing negative rental reversions over its latest 4Q set of results, along with stabilised retail leasing levels as shopper traffic and tenants’ sales rebounded y-o-y.

“While [Suntec REIT’s] valuations are not very compelling given the run-up in share price, a total return of c.5% justifies our Hold rating. Upside risk could come from a faster recovery in retail rents while downside risk could come from slower economic growth,” notes the analyst in a separate report on Thursday.

In Lock’s view, Suntec REIT also has visible acquisition growth opportunities in the medium-term given its option to buy an additional 25% stake in the Southgate Complex in Melbourne, and potentially one of the office towers of 9 Penang Road post the completion of the project’s redevelopment in 2019F.

OCBC Investment Research, however, has downgraded Suntec REIT to “sell” from “hold” previously despite a slightly higher fair value of $1.81 from $1.80 as it rolls forward its valuations.

In a Thursday flash note, OCBC analyst Andy Wong explains that the move comes on the premise of rich valuations and flat 4Q DPU performance, and the belief that markets have more than priced in a strong recovery in Singapore office rentals.

Based on OCBC’s forecast, Suntec REIT is trading at a distribution yield of 4.7% for FY18F, which comes in approximately 2.2 standard deviation points below the five-year mean of 5.7%.

Likewise, Maybank Kim Eng is maintaining its “hold” recommendation on the REIT with a higher target price of $1.91 compared to $1.89 previously to reflect slightly better signing rents at Suntec City Offices.

In separate report on Thursday, Maybank analyst Derrick Heng notes stable DPU performance over the past financial year and the likely improvement of office reversions in 2018, with the magnitude of weakness possibly lessening with the stronger office sentiment.

He particularly highlights Suntec City Mall’s ongoing re-jig as a “work in progress”, and therefore a theme to watch in the medium term.

However, as rental reversions for Suntec REIT’s offices could nonetheless remain negative this year, Heng instead sees better value in developer landlords with large prime office exposure – such as UOL and GuocoLand – for exposure to Singapore’s recovering office market.

As at 10.49am, units of Suntec REIT are trading flat at $2.15, implying a FY19 forward dividend yield of 4.79% based on CIMB forecasts.

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