SINGAPORE (July 26): CGS-CIMB Research and DBS Vickers Securities are maintaining their “add” and “buy” calls with the respective price targets of $2.08 and $2.30, after the REIT manager on Wednesday posted a 2Q DPU of 2.47 cents which came in line with both research houses’
In a Wednesday report, CGS-CIMB analyst Lock Mun Yee says she continues to like the stock as it continues to see robust office leasing interest, which is evident from the 187,000 sq ft of leases which it signed in 2Q with tenants in technology, media and telecom (TMT) as well as real estate, co-working and consultancy sectors.
This comes despite lower y-o-y office revenue in 2Q, which was due to transitory downtime from replacement leases that were signed earlier, of which a majority were larger floor plates.
On the retail front, the analyst also notes rising tenant sales and shopper traffic.
With development activities the Suntec office and 9 Penang Road, as well as the construction of 477 Collins Street on-track with their schedules, Lock believes these properties should add to the REIT’s income stream once completed, with the potential to increase leverage to fund capex requirements going forward.
The analyst has however marginally adjusted down her FY19-20F DPU estimates to factor in the higher sinking fund contributions at Suntec City, resulting in a lower target price compared to $2.12 previously.
DBS’s view on the REIT is more bullish with its street-high target price compared to the $1.88 consensus. According to the research house, this comes pegged to a price that would allow any potential bidder to generate a 10% internal rate of return (IRR).
“While we are not privy to any potential takeover offers, our analysis was done to reflect market speculation of a Suntec privatisation over the years,” explains DBS analyst Mervin Song in a Thursday report.
The way Song sees it, Suntec deserves to trade towards $2.30 considering how office buildings and shopping malls in Singapore hav been recently sold on 1.7-2.7% and 3-4% exit yields, respectively, which is below the cap rate of 3.75-4% and 5% used to value Suntec’s office and retail properties.
“With office rents expected to be on a multi-year upturn, this typically coincides with office REITs such as Suntec, trading at a premium to book,” says the analyst.
“Passing rents at Suntec City Mall of $10-11 psf/mth are at a significant discount to other suburban malls of up to $17-18 psf/mth. 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,” he adds.
Units in Suntec REIT last traded at $1.87, or 29.7 times FY19F P/E according to DBS estimates, before the midday trading break.
