SINGAPORE (Apr 26): RHB and Maybank Kim Eng are maintaining their "hold” calls on Suntec REIT with target prices of $1.75 and $1.94 respectively, a day after the release of its latest 1Q18 results.
In contrast, DBS is maintaining its “buy” on the REIT with a target of $2.30 while OCBC is upgrading its call to “hold” from “sell" with a fair value of $1.84 and CIMB is upgrading the REIT to “add” from “hold” with $2.12 target.
See: Suntec REIT declares 1Q18 DPU of 2.433 cents on higher revenue contribution
In a Wednesday report, RHB analyst Vijay Natarajan says he expects Suntec REIT’s DPU to remain flat for over the next two years, before picking up by end-2020 when contributions from two development properties begin kicking in.
The analyst is anticipating flat to slightly negative rental reversions for office leases over FY18, but nonetheless remains positive on the asset enhancement initiative (AEI) works planned for the Suntec City Offices, which he believes are “timely to fend off increasing competition” from newly-completed office buildings in the central business district (CBD) and Marina Bay district.
Natarajan also likes Suntec REIT for the steady progression of its development projects at 9 Penang Road, which is on-schedule to complete by 2019, and 477 Collins Street in Australia given it is now 45.8% pre-committed ahead of its expected completion in mid-2020.
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“Amidst challenging local market conditions, management has been actively revamping and repositioning its key asset, Suntec City, which we see as a long term positive. The REIT has also been actively expanding its Australian presence, with the market now accounting for ~13% of NPI (from nil prior to 2013),” says Natarajan.
On the other hand, Maybank has raised its FY18-20E DPU by 1% to factor in the REIT’s acquisition of another 25% stake in Southgate Complex by end-May this year, resulting in a higher target price of $1.94 from $1.91 previously, based on an unchanged target yield of 5.25%.
In a report on Wednesday, Maybank analyst Derrick Heng says he instead prefers developer landlords such as UOL and GuocoLand, both rated “buy” at the respective target prices of $10.40 and $3, for office exposure as Suntec REIT saw weaker headline revenue over the latest quarter in comparison.
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“Nonetheless, management guides that top line weakness was due to transitory downtime from replacement leases. Committed occupancy at Suntec City Offices remains high at 99.1% with healthy signing rents of $8.95 psf pm,” he notes.
DBS lead analyst Mervyn Song however highlights that the weakness in revenue contributions from the REIT’s Suntec office was offset by improvements at Suntec Mall, which continues to show a turnaround with 1Q revenue and NPI up 2.3% and 5.9% on-year, respectively.
In his view, the strong 1Q operation statistics for Suntec Mall gives him confidence that a turnaround remains on track, and that the management currently has the right strategies in place to achieve higher rents at the mall going forward.
“The average passing rent for Suntec Mall stands between $10-12 psf compared to other suburban malls of up to $18 psf/mth. For the quarter, we understand, Suntec was able to generate slightly positive rental reversions for its retail leases,” observes Heng.
Going forward, the analyst sees several catalysts to drive the REIT’s earnings higher, including its acquisition of the additional interest in Southgate Complex, as well has higher signing rents at Suntec Mall as tenant sales there have improved.
“While Suntec office’s earnings disappointed in 1Q18, we believe with spot office rents in Singapore rising rapidly, prospects for positive rental reversions are increasing, translating to higher earnings ahead,” he adds.
OCBC lead analyst Andy Wong says his upgrade comes on the belief that valuations are now less demanding than before, with Suntec REIT now trading at FY18F distribution yield of 5.3% after a unit price correction of 11.6% since his downgrade to “sell” in Jan 2018.
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On the REIT’s recent 1Q performance, he comments: “We believe rental reversions were flattish in 1Q18, an improved situation as reversions were likely negative in FY17. We expect office spot rents to continue its upward trajectory this year, which augurs well for Suntec REIT.”
Also noting improved retail and convention performance over the latest quarter, CIMB lead analyst Lock Mun Yee underscores inorganic growth as another possible earnings driver in the medium-term, and says that in the longer run, one of the office towers of 9 Penang Road could be acquired post-redevelopment in 2019.
In particular, she believes the REIT is showing some value at its current unit price, as it trades midway between its long-term average and at +1 standard deviation forward yield range, amid a stabilising retail leasing earnings outlook.
“Given the current volatile markets, we believe a good entry point would be closer to its long-term average level, i.e. closer to the $1.80 mark,” says Lock.
As at 12.27am, units in Suntec REIT are trading 1 cent higher at $1.91 or 0.88 times FY18 book based on RHB forward estimates.
