Suntec REIT is the most undervalued commercial Singapore REIT (S-REIT), leading its peers with the highest two-year DPU CAGR, according to DBS Group Research analysts Rachel Tan and Derek Tan.
In a report, the analysts say Suntec REIT’s two-year DPU cumulative annual growth rate (CAGR) of 12% is the highest among its commercial S-REIT peers. The REIT is currently trading at 0.7 times price to net asset value, while its peers are trading between 0.8 times to 1.2 times price to net asset value.
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Given the projected growth in FY22F, Suntec REIT’s dividend yield ranks the highest at 6.5% while its peers are trading at an average of 5.7% FY22F dividend yield, the analysts add.
Although the economic reopening has slowed following the resurgence of the Delta variant, the analysts estimate that Suntec REIT is positioned to deliver strong FY22F growth. This is led by a full-year contribution from recent accretive acquisition as well as the recovery from the ongoing reopening.
In October 2020, Suntec REIT made its first foray into the UK office market by acquiring The Nova Properties with 4.9% DPU accretion, based on pro forma estimates. Less than a year later in June 2021, it acquired another prime London office, The Minster Building. With 3.6% DPU accretion based on pro forma estimates.
The REIT has also crystalised value through the sale of its stake in 9 Penang Road and strata units at Suntec City Office Tower for a collective $1.2 billion, both at above latest valuations. The assets were divested at 3.3% and 3.1% yields respectively.
The analysts estimate Suntec REIT to record an approximately 20% year-on-year growth in FY22F DPU and a two-year CAGR of 12% from FY20 to FY22F. If the reopening progresses as planned, Suntec REIT’s core DPU could surpass pre-Covid 19 levels, they add.
Meanwhile, the potential merger between Hong Kong’s ESR Cayman and Singapore’s ARA Asset Management, which focuses on new economy assets, could result in Suntec REIT being an attractive acquisition or privatisation target. Alternatively, the introduction of a new strategic investor could be the next catalyst for the REIT, the analysts note.
As Suntec REIT’s portfolio comprises mostly small and medium enterprises tenants, a longer-than-expected economic recovery and new waves of Covid-19 infections could increase the risk of early lease terminations and vacancies.
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DBS maintains “buy” on Suntec REIT, with a higher target price of $1.90 from $1.85 previously.
As at 3.10pm, units in Suntec REIT are trading 3 cents lower or 2.11% down, at $1.39.