SINGAPORE (Jan 24): Analysts believe Suntec REIT could see better days ahead with retail continuing to improve and office rents expected to be on a multi-year upturn.

“Since early 2018, more sell-side analysts have joined us in being bullish on Suntec,” DBS Group Research lead analyst Mervin Song says in a report on Thursday.

“As there is mounting evidence of a sustained turnaround at Suntec City Mall, spot office rents at an upward trajectory and underlying DPU to improve by 3-4% per annum between 2018 and 2021, we believe more investors and other sell-side analysts will be convinced that Suntec is undervalued,” he adds.

DBS is keeping its “buy” call on Suntec REIT with an unchanged street-high target price of $2.12.

The latest report comes after the manager of Suntec REIT on Wednesday posted distribution per unit (DPU) of 2.59 cents for 4Q18, some 0.5% lower than DPU of 2.60 cents a year ago.

Gross revenue increased by 7.0% to $93.5 million, mainly due to higher revenue contribution from Suntec City mall, its convention centre business and 177 Pacific Highway.

Net property income (NPI) rose by a smaller 2.3%, due to the $4.8 million sinking fund contribution for Suntec City office.

See: Suntec REIT posts 0.5% drop in 4Q DPU to 2.59 cents on higher revenue

“We believe as Suntec remixes its tenant mix and picks the low-hanging fruits such as placing children stores next to the playground rather than at opposite ends of the mall, the resultant higher foot traffic, tenant sales and improving rents should act as re-rating catalysts,” Song says.

However, Jefferies analyst Krishna Guha notes that Suntec REIT’s gearing is relatively high at 38.1%, and cautions that its expansion in Australia might be at an elevated valuation.

“Expansion in Australia is source of diversification but may have come at peak of cycle especially with two broad sectors, banks and commodities, experiencing headwinds,” Guha says in a report on Wednesday.

Jefferies is keeping its “hold” recommendation on Suntec REIT, but raising its target price to $1.85, from $1.80 previously.

The higher target price comes as the research house tweaks its DPU estimates for FY19 and FY20 up by 0.6% and 1.3%, respective. This is mainly due to higher expected rental reversion, higher top ups, and increased contribution to joint venture income from Southgate Complex, 9 Penang Road and 477 Collins Street.

“While Suntec City mall is delivering good results, we think Suntec office may take a while to revert to the 2017 quarterly average NPI of $27 million,” Guha says.

The way RHB Research analyst Vijay Natarajan sees it, Suntec REIT has been actively redeveloping and revamping its assets, but effects are likely seen only from 2H20 onwards.

“The strong rebound in office rental rates and repositioning of the retail mall has benefitted the REIT, with Suntec City Office and retail seeing positive rentals reversions of 10% and 3% for 2018,” Natarajan says.

RHB is keeping its “neutral” rating on Suntec REIT with an unchanged target price of $1.90.

Looking ahead, Natarajan believes Suntec REIT might look to acquisition opportunities to bolster operational DPU.

“We believe the REIT might potentially look at acquiring the remaining 50% stakes in Olderfleet and Southgate Complex in the near term. With gearing at 38.1%, we see limited debt headroom, and future acquisitions are likely to be a combination of equity and debt,” he adds.

As at 2.52pm, units in Suntec REIT are trading 3 cents higher, or up 1.6%, at $1.90. Accrding to DBS valuations, this implies an estimated price-to-earnings ratio of 31.1 times and a distribution yield of 5.3% for FY19.