Following Suntec REIT’s $756 million acquisition of properties in London on Oct 8, analysts at CGS-CIMB, DBS Group Research and OCBC Investment Research have maintained their “add” or “buy” calls.
See: Suntec REIT diversifies into UK with $756 million acquisition of London properties
Chong Kee Hiong, the CEO of Suntec REIT’s manager says that the move is a “strategic fit” to the REIT’s existing portfolio in Singapore and Australia.
Chong adds that the net property income yield of 4.6% will provide a distribution per unit (DPU) accretion of 4.9% upon the completion of the acquisition in December 2020.
CGS-CIMB’s Lock Mun Yee and Eing Kar Mei view the acquisition as positive, as they raise their target price to $1.73 from $1.70 on the counter. Lock and Eing have also increased their DPU estimates for FY21 and FY22 by 0.94-5.64% to include contributions from the new acquisition, on the basis that the acquisition of fully debt funded.
“Suntec REIT is trading at FY20-21F dividend yield of 4.7-6.1%. We like the location and quality of the Nova properties but think that Suntec REIT’s higher gearing could be a drag on near-term share price performance,” they write in a report dated Oct 9.
“Re-rating catalyst could come from better clarity on its acquisition funding strategy. Downside risks: higher-than-estimated rental waivers to retail tenants,” they add.
DBS analysts Rachel Tan and Derek Tan have maintained their target price of $1.81, which “implies 0.87x price to net asset value (P/NAV) which is close to its historical mean and 4% dividend yield”.
Viewing the acquisition as positive, Rachel and Derek believe that the addition of quality assets with a 11.1-year weighted average lease expiry (WALE) to the REIT’s portfolio adds income visibility and reduces near-term earnings risks.
The analysts believe that the DPU-accretive acquisition will also drive the REIT’s underlying DPU growth and further reduces the reliance on its capital distribution.
“The long WALE and 100% committed occupancy will provide stable earnings contribution from the asset. In addition, possible upside could be derived from rent review generally every five years at market or existing rent, whichever is higher,” they say.
Despite the REIT’s high gearing of 45.2% following the acquisition, which is “one of the highest” among its peers, Rachel and Derek “see a more measured pace of deleveraging over time with potential asset divestments and tapping the perpetual market to manage its gearing”.
“While we acknowledge that recovery could be gradual for Suntec City Mall, the progressive relaxation and the return of office workers will bode well for Suntec City Mall and its office buildings as the economy gradually recovers,” they say.
“With increased effort to relax travel border restrictions, we believe we will continue to see steady progressive return of traffic. Suntec, currently trading at 0.7x P/NAV (close to -1 standard deviation or SD), has limited downside risks and is poised to ride on the recovery,” they add.
The team at OCBC Investment Research has also maintained its fair value (or target price) at $1.57.
While the team sees the acquisition as having “more positives than negatives”, they feel that equity fund raising risks remain.
“Management highlighted that its longer-term aggregate leverage target remains at 42-45%. Besides equity, another funding option could also be the issuance of perpetual securities. This would reduce the accretion level of the acquisition,” they say.
UOB Kay Hian analysts Jonathan Koh and Loke Peihao says that this is an “opportune time” to invest in Suntec REIT as the REIT’s three newly completed buildings – 9 Penang Road in Singapore, 477 Collins Street in Melbourne and 21 Harris Street in Sydney – will add to its full-year contributions for 2021.
Echoing the DBS analysts’ views, Koh and Loke expects the Suntec City Office to maintain positive rental reversion due to the gradual returning of employees to their offices, which will improve shopper traffic and tenant sales at Suntec City Mall.
To that end, Koh and Loke have upgraded the counter to “buy” from “neutral” with a lower target price of $1.72 from $1.99 previously.
Beyond the new contributions from its three properties, Koh and Loke also view the REIT’s increase in geographical diversification, including its strategic investments in cities such as Seoul, Tokyo, Paris, Frankfurt and Berlin as positives.
The pair forecast the REIT to report a total DPU of 9.2 cents for 2021 and 9.8 cents for 2022, and that the REIT will release $5 million of the $10.3 million distributable income retained in 1H2020, in 2H2020.
As at 11.50am, units in Suntec REIT are trading 2 cents higher or 1.4% up, at $1.46.
