Analysts are mixed on Suntec REIT’s prospects after the REIT reported higher distribution per unit (DPU) and revenue for the 1QFY2022 ended March.
On April 26, the REIT reported DPU of 2.391 cents for the 1QFY2022, up 16.9% y-o-y.
Following the REIT’s business update, CGS-CIMB Research analyst Lock Mun Yee has downgraded her recommendation to “hold” from “add” previously with an unchanged target price of $1.79.
The downgrade comes as the analyst sees limited total returns in the near term, says Lock in her report dated April 26.
Suntec REIT’s 1QFY2022 distributable income of $68.2 million, which rose 18.2% y-o-y, stood slightly below her estimates at 22% of her full-year forecast. The REIT’s DPU also stood at 22% of her FY2022 estimates.
On this, Lock has lowered her DPU estimates for the FY2022 to FY2024 by 1.84% to 4.27% as she aligns her assumptions for the lower proportion of fees paid in units to 50% (from 80% in FY2021), in line with management’s guidance.
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Looking ahead, Lock sees the faster-than-expected recovery of Suntec REIT’s retail and convention business with the recent relaxation of Covid-19 measures as a catalyst to its unit price, while downside risks include the emergence of a new variant that could impact the reopening of the economy.
Citi Research analyst Brandon Lee has kept his “neutral” call on Suntec REIT with a target price of $1.56.
To him, the REIT’s business update reflected that the REIT was making a move in the right direction, albeit marginal.
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“Suntec REIT’s 1QFY2022 business updates painted a robust operational environment for Singapore’s office sector, evidenced by positive reversions, improved occupancy and greater enquiries across a more diversified pool of tenants. While retail rent reversion outlook has improved to positive 0-3% (vs. -5% last quarter), higher labour costs could mitigate rental upside, in our view,” Lee writes.
The analyst adds that he sees the lower proportion of management fees in units and the return of capital gains as a “move in the right direction”.
However, he notes that the lack of property-by-property revenue and NPI breakdown (except Suntec City) was a slight disappointment.
Suntec REIT, which saw its shares re-rate some 21% year-to-date (y-t-d), has “significantly outperformed” S-REITs, which stood flat within the same period.
But with its FY202/FY2023 yield at 5.1% and 0.9x P/B in line with past office upcycles and with its continued high gearing of 43.3%, Lee has indicated his preference for Keppel REIT.
“Higher-than-expected DPU-accretion from potential acquisitions (Singapore), divestments (Australia) to reduce debt and potential share buybacks are share price catalysts,” the analyst writes.
Further to his report, Lee says, “We see muted share price reaction on valuations, with less disclosure on property-by-property performance offset by lower fees in units and return of capital gains”.
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Meanwhile, Maybank Securities analyst Chua Su Tye has kept “buy” on Suntec REIT with a higher target price of $2 from $1.80 as he sees the REIT riding on the tailwinds of reopening.
He has also raised his DPU estimates for the FY2022 to FY2024 by 5% to 8% on the back of the REIT’s stronger-than-expected results for the 1QFY2022. The higher DPU estimates were also made on the back of visibility on capital distributions, says Chua.
In addition, Chua says he expects Suntec REIT’s office and retail assets in Singapore to see strengthened fundamentals on the back of the further easing of restrictions, reopened borders and rising rents. During the 1QFY2022, the analyst notes that the recovery of the REIT’s retail portfolio is on “firm footing”.
“Suntec City mall’s performance improved further in 1QFY2022, with revenue +12.9% y-o-y and NPI +13.3% y-o-y. This was underpinned by higher occupancy of 96.0% (from 94.7% in 4QFY2021) and new tenants (48% of leases, vs 40% in FY2021),” Chua writes.
“Rental reversion was flat (vs -11.8% in 4QFY2021), which was better than earlier guidance of -5% to -10%, with the reversion outlook raised to 0-5% for FY2022. Domestic demand for consumer and corporate events will remain the key near-term driver for the convention business to reach breakeven, before a MICE-led recovery expected in FY2023,” he adds.
The REIT’s Singapore office rents are also set to rise with strong demand that continues to be led by the tech industry and financial institutions.
“We expect reversions to ease, while staying slightly positive, given the higher expiring rents (at $9.38 psf pm vs $9.26 psf pm passing rents),” says Chua. “Occupancy in Australia/UK was stable at 94.3%/98.3%, with NPIs well-cushioned by rent guarantees at 21 Harris and 477 Collins, and visibility backed by a long 10.4-year weighted average lease expiry (WALE).”
Noting the REIT’s recent share price growth, Chua says that its strong share price action suggests scope for equity fund raising (EFR) opportunities, which could support its balance sheet and support accretion from potential deals.
Looking ahead, Chua says he expects the REIT’s DPU to rebound from the FY2021 with the completions and contributions from 9 Penang Road, 21 Harris Street, 477 Collins Street and Nova properties.
RHB Group Research analyst Vijay Natarajan has, similarly, kept “buy” Suntec REIT with a higher target price of $2 from $1.78 as he sees a brighter outlook ahead for the REIT.
To him, the REIT posted a “good set” of numbers for the 1QFY2022, which came in slightly above his expectations.
“Operational performance improved across both office and retail segments and is set to further recover with the easing of most Covid-19 related restrictions. Despite a good absolute performance of +21% y-t-d (vs S-REITs’ +1%) Suntec is still trading at a 14% discount to book value,” the analyst says.
In addition to his higher target price, Natarajan has lifted his DPU estimates for the FY2022 to FY2023 by 2% to 3% to factor in slightly better rents and occupancy. He has also lowered his cost of equity (COE) assumptions by 50 basis points.
“We also raise Suntec’s environmental, social and governance (ESG) score to 3.1 out of 4.0 (from 3.0) on the back of more concerted environmental initiatives. As this score is one notch above country median we apply a 2% premium to our dividend discount model (DDM)-derived intrinsic value,” he says.
Units in Suntec REIT closed 1 cent higher or 0.54% up at $1.85 on April 27, or an FY2022 P/B of 0.88x and dividend yield of 5.65%, according to CGS-CIMB’s estimates.
