Analysts are generally positive on Suntec REIT with strong FY2021 results led by newly acquired and completed assets. With the exception of Maybank Securities’ “hold” recommendation, analysts from DBS Group Research and RHB Group Research have kept their “buy” calls on the REIT.
Suntec REIT, on Jan 26, reported a distribution per unit (DPU) of 4.512 cents for the 2HFY2021 ended December, up 9.8% y-o-y. The higher DPU was helped by contributions from its new UK properties and higher income from Suntec City mall.
In addition to his “buy” rating, RHB analyst Vijay Natarajan has given the REIT a higher target price of $1.77 from $1.72.
The way he sees it, there are several positives on the REIT, its higher occupancy in 4QFY2021 across most of its office assets being one of them.
Suntec REIT’s retail portfolio is also “showing signs of stabilisation with tenant sales improving back to pre-Covid-19 levels,” says the analyst in his Jan 27 report.
The REIT is also not expected to offer any significant rent assistance in 2022, from the $6 million in rent rebates offered to its tenants in 2021.
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Suntec REIT’s management has also indicated that it remains “upbeat” on its office outlook due to limited supply, an improved economic outlook as well as tightened vacancy. The REIT is also likely to see positive rent reversion albeit at low single digit levels due to the high base effect from the year before.
Finally, Suntec REIT’s valuation remains attractive; it is currently one of the cheapest S-REITs at 0.7 times price-to-book (P/BV), which Natarajan believes is “unjustified”.
To this end, the RHB analyst has upped his DPU estimate for the FY2022 to FY2023 by 2% to 3%, which factors in higher occupancy and a revised interest cost.
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In addition, the analyst foresees portfolio rebalancing likely to continue, with gearing lowered to 43.7% (from 44.3%) on the back of higher portfolio value, and planning amendments from authorities for Southgate (50% stake) retail asset enhancement and development of new office towers have been obtained.
“We believe that a likely possibility is the divestment of its stake to [its] joint venture (JV) partner at a higher valuation, factoring in redevelopment potential and reinvest the proceeds elsewhere,” says Natarajan.
The REIT, in August 2016, formed a JV to acquire its stake in Southgate Complex.
“About $500 million of debt is pending refinancing this year, where management noted that interest costs have started to inch up and is looking to increase its fixed rate borrowings which currently stands at approximately 53%,” he continues.
At the same time, DBS Group Research analysts Rachel Tan and Derek Tan believe that Suntec REIT is “an attractive acquisition and privatisation target”.
As such, they have kept their “buy” call and target price of $1.90, which represents a 23% upside as at their report dated Jan 26.
Their target price implies 0.9 times Suntec REIT’s price-to-net asset value (P/NAV), in line with its peers’ average and a dividend yield of 5%.
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“The potential acquisition of ARA Group, which the new entity will focus on new economy assets, could result in Suntec REIT being an attractive acquisition/privatisation target at the current underpriced valuation,” say the analysts.
Like RHB’s Natarajan, the DBS analysts note that the REIT, which is trading at -0.5 standard deviation, is the most undervalued commercial S-REIT at present.
“Suntec REIT is currently trading at 0.7 times P/NAV vs peers’ average of 1 times P/NAV, and it is the most undervalued commercial S-REIT, given that its two-year DPU compound annual growth rate of 12% is the highest among peers,” they write.
Some risks that the analysts consider however include longer-than-expected economic recovery and potential new waves of Covid-19.
“As Suntec’s portfolio comprises a higher composition of SME tenants, a longer-than-expected economic recovery and new waves of Covid-19 could increase risks of early lease terminations and vacancies,” they explain.
On the other hand, Maybank analyst Chua Su Tye has kept his “hold” rating albeit with a raised target price from $1.40 to $1.45.
On its results, Chua notes that the REIT’s “overseas diversification has helped improved its DPU visibility, but gearing remains high versus peers and history, and is likely to cap accretion from further deals.”
Moreover, rental reversion was softer at -11.8% (from -11.2% in 3QFY2021 and -7.2% in 2QFY2021), better than earlier -15% guidance, but expected to remain weak at -10% in FY2022E, he says.
“Recovery in tenant sales (with Dec 2021 above Dec 2019) was ahead of footfall at approximately 60%, which we expect to see a lift from returning physical office occupancies in FY2022,” he adds.
While Chua notes that Suntec’s diversification into more resilient longer WALE Grade A assets in the UK has strengthened its assets under management (AUM), further upside from accretive acquisitions will likely need to be timed with divestments, or equity market performance.
“We prefer CICT, given catalysts from DPU recovery in 2021, and redevelopment upside,” Chua adds.
In addition, the Singapore research team at OCBC Investment Research also posit mixed reviews for Suntec REIT. The team acknowledges that Suntec City Mall’s tenant sales per square foot (psf) in Dec 2021 has slightly exceeded 2019 average levels (pre-pandemic), although tenant sales psf on a same store basis and footfall are still lagging, where negative rental reversions widened slightly to -11.8% in 4QFY2021, versus -11.2% in 3QFY2021, such that FY2021 rental reversions were -14.4%, but a tad better than management’s -15% guidance.
“This will, however, remain weak in 2022 and management is guiding for -5% effective rent reversion, with gross turnover rent (GTO) component now forming 5-6% of its retail rental income, versus 4% previously,” write the analysts.
As at 4:49pm, units in Suntec REIT are trading at $1.55.
