RHB Group Research analyst Vijay Natarajan has kept a “buy” rating on Suntec REIT with a lowered target price of $1.95 from $2.
In his July 18 report, the analyst notes that Suntec REIT’s price has dropped by 15% from the peak in April, mostly on concerns over the increase in financing costs from the sharp spike in interest rates.
“We still think upside from organic income growth on its office and retail portfolio should more than offset the negative impact of its low debt hedge profile,” says Natarajan.
The REIT is currently trading at 0.7x P/BV – a stark contrast from the high premium paid in Singapore office transactions in the market, observes Natarajan.
Suntec REIT’s Singapore office assets, encompassing almost half of its income, has had positive rental reversions for the last 15 quarters.
Rent reversion was at 5.3% in 1Q, and should grow by low-to-mid single digits this year, amid continued strength in Singapore office sector rental rates.
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The REIT’s overseas office assets, approximately 35% of income, are typically on long leases, with annual rate escalation clauses (of 2%-3% per annum in Australia) and rent review (typically pegged to inflation index) in the UK.
The positive rent growth mitigates the impact of rising interest rates, says Natarajan, as it has among the lowest hedges of the REITs, where approximately 51% of debt is hedged, and every +50 basis points (bps) will have an approximate -4.7% impact on distribution per unit (DPU).
Meanwhile, Suntec City Office strata unit sales indicate a huge valuation gap, says the analyst. In June, an entire office floor on the 30th storey in Suntec City Tower 2 was sold at a record $38.8 million, or $3,300 per sqft.
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Based on media reports on the Suntec Office Sale, another floor has been put on the market at $36million or $3,600 per sq ft. The indicative per sqft sale price is around 50% higher than Suntec City’s office area’s end-2021 valuation of $2,415 per sqft.
“This indicates Suntec City’s BV/share of $2.13 is very conservative, and the current traded price of 30% below its BV seems to be a bargain,” says Natarajan.
Suntec City mall has registered flattish rent reversion in 1Q, after seven straight quarters of negative rent reversions, with the occupancy rate up 1.3 percentage points (ppt) q-o-q to 96% and a positive outlook for the rest of the year.
Its convention segment – which has been in the red for the past two years – is also expected to turn profitable in 2HFY2022 ending December, according to the analyst.
At the same time, divestment still on the cards for Suntec REIT. Management is still evaluating other divestment opportunities in its portfolio, possibly 177 Pacific Highway, and reevaluating its redevelopment plans for Southgate Complex (50% stake), to take into consideration changing work-from-home trends and micro market demand.
“A potential divestment at a premium to [Suntec REIT’s] BV could further enhance BV and address its gearing (43.3% currently) and hedging concerns,” says Natarajan.
Further to his report, the analyst has trimmed his DPU estimates for the FY2022-FY2024 by 1%-3% post tweaking interest cost assumptions.
As at 10.17am, units in Suntec REIT are trading at 1 cent up or 0.64% higher at $1.58 at a FY2022 P/B ratio of 0.74x and dividend yield of 5.7%.
Photo: Samuel Isaac Chua/The Edge Singapore
