PhillipCapital analyst Liu Miaomiao has initiated a “buy” call on Suntec REIT with a target price of $1.47. Liu’s target price is based on a dividend discount model (DDM) valuation, cost of equity (COE) of 10.4% and terminal growth of 1%.
Suntec REIT is a commercial REIT that owns office and retail assets. Among its portfolio, which is spread across Singapore, Australia and the UK, are several Grade A office buildings including its offices in Suntec City in Singapore. In addition, the REIT owns a one-third stake each in One Raffles Quay and MBFC (or Marina Bay Financial Centre) Towers 1 and 2.
The REIT also owns a 66.3% interest in Suntec Singapore Convention & Exhibition Centre, as well as a 100% stake in Suntec City Mall.
In her report dated Sept 11, Liu likes the REIT’s “healthy operating metrics”, noting its rental reversion and occupancy rates logged in its results for the 1HFY2023 ended June. During the period, the REIT’s Singapore offices reported a rental reversion of 10.8% and an overall occupancy rate of 99.3%. Occupancy for Suntec City Mall remained stable at 98.3% with a rental reversion of 18.7%. The mall’s tenant sales surpassed its pre-Covid-19 levels by 108%. Suntec Convention also performed well during the six-month period with revenue surging by 95.2% y-o-y to 83.7% of its pre-Covid-19 levels.
She is also positive about the REIT’s decision to conduct divestments instead of conducting an equity fundraising to lower its gearing. The REIT had successfully divested three of its office strata units in Suntec, collecting some $14 million in proceeds. Suntec REIT was also eyeing a potential divestment for its mature assets such as 477 Collins Street in Melbourne. The building is currently valued at $433.3 million.
“With the target of lowering the gearing to 40% ([it is] currently at 42.6%, +20 basis points y-o-y), we believe Suntec REIT needs to divest [around] $200 million worth of assets more,” Liu writes.
At its last-closed price of $1.21 as at Sept 10, the REIT’s valuation is at a near-record low.
“Suntec REIT is currently trading at 0.33 standard deviation (s.d.) below the mean and 0.57x P/NAV (FY2023, NAV [of] 2.13) which is below the average Singapore REIT (0.86x P/NAV),” Liu notes.
“Despite the hike in Singapore 10-year bond yield to 3.22%, Suntec REIT is still trading at a positive spread of 2.33% (FY2023). Suntec REIT can benefit the most from an interest rate cut due to its lower fixed rate debt of 58% versus peers' 76% (Keppel REIT), 78.3% (Mapletree Pan Asia Commercial Trust or MPACT) and 78% (CapitaLand Integrated Commercial Trust or CICT),” she adds.
In FY2023, the analyst is expecting the REIT to report a total distribution per unit (DPU) of 5.83 cents, which translates into a yield of 5.64%. In FY2024, her DPU estimate is at 7.29 cents, which represents a yield of 6.03%. Based on her estimates, the REIT’s net property income (NPI) yield for FY2023 is at around 4.2%.
As at 12.24pm, units in Suntec REIT are trading 2 cents higher or 1.67% up at $1.22.