RHB Group Research analyst Vijay Natarajan has maintained his ‘buy’ call on Suntec REIT with a lower target price of $1.72 from $1.79, representing a 18% upside on the counter’s last closed share price. 

While the REIT’s share price has corrected some 5% over the last month since the announcement of the tightened restrictions in Singapore as well as its removal from the MSCI Singapore Index, Natarajan deems the REIT’s valuation as “still attractive” at 0.7 times price-to-book ratio (P/B).

In his report dated June 3, Natarajan states that he expects the REIT’s share price to “recover, barring a prolonged lockdown”.

To him, the tighter restrictions pose a “limited impact to its office portfolio but the retail or convention segment is expected to see a slightly bigger hit”.

“Suntec REIT’s office assets accounted for 83% of total 1QFY2021 net property income (NPI)”. However, with Singapore’s Phase 2, heightened alert, work from home is the default option, compared to a 75% limit prior. 

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Natarajan observed that “this is likely to have a negative impact on the office leasing momentum which was on a recovery path since the start of the year, as tenants are likely to adopt a wait and watch approach on signing new and expansion leases.”

“However, we expect the leasing activity to stage a gradual recovery upon opening, with office demand seen from tech media and telecommunications (TMT), pharmaceutical and financial services sector.” 

Natarajan expects the REIT’s “Singapore portfolio occupancy to slightly improve to 97% by the end of FY2021 and rent reversions to stay positive.”

Due to the tightened restrictions, tenant sales and shopper traffic are likely to take a severe hit. 

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“Rent reversion (1Q) was -26.2%, excluding anchor lease of -16%, mainly due to signing of new leases, with lower base rents and higher turnover component.”

“About 14% of leases are due for renewal and we expect effective rent reversions to be in the -10% to -20% range”, says Natarajan. 

“Management remains cognisant of its high gearing of 44.4% and reiterated during the recent briefing that it is looking at divesting some of its mature assets to enhance its debt headroom.”

RHB Group Research lowers their FY2021 to FY2023 distribution per unit (DPU) by 3 to 5% mainly by removing capital top-up assumptions and tweaking occupancy assumptions. 

As at 2.41pm, shares are trading flat at $1.46, or 0.72 times P/B, according to RHB’s estimates.