Category: Suntec
Suntec – DMG
Great connectivity, value not fully appreciated
Raising our target price to S$1.45 from S$1.24. Our DDM-backed target price reflects a lower cost-of-equity assumption of 9.1% (9.6% previously). We raised our FY09 DPU estimates to 10.52¢ from 9.91¢, as we assume 5% rental growth for Suntec City mall (-5% previously). Suntec will be reporting 3Q09 results on 27 Oct and we expect annualised DPU of 10.52¢, a marginal increase over FY08. Maintain BUY.
Healthy leasing activity. For 1H09, Suntec renewed and signed 375,000 sqft of office space. With this, the remaining office leases expiring in FY09 amounts to approximately 84,000 sq ft or 4.5% of the total office NLA. Suntec has seen healthy leasing activity, with eBay/PayPal taking a 28,000 sqft lease in Tower 5 (UBS’s former space). COSL Drilling, Interoil Singapore (oil & gas), Asia Green Capital (investment bank), Dan Bunkering (bunker trader) are among the new tenants at Suntec City.
Still under-rented but positive rental reversion unlikely to transpire. Passing rents for Suntec City office average about S$6/sqft, marginally below spot transactions of between S$6-7/sqft. Management acknowledged that it is clearly still a tenants’ market and the focus on tenant retention remains paramount. In our view, management will likely shift their focus to occupancy optimisation at the expense of rental rates, capping the likelihood of positive rental reversion in the coming quarters.
Retail reprieve on overall earnings. With retail contributing to 53% of overall income, we expect earnings prospects to remain favourable compared to CCT. We believe the spectre of higher retail footfall at Suntec City is likely to transpire when the Circle Line becomes fully operational in 2010. The opening of Esplanade and Promenade stations will materially enhance Suntec’s traffic footfall, a case that is currently seen in ION Orchard mall, given its connectivity with Orchard MRT. At current prices, Suntec offers investors an attractive dividend yield of 8.6% for FY10. Stock traded at 4.6% yield between 2005 and 2007. At our TP of S$1.45, stock still offers attractive yield of 6.5%.
REITs – OCBC
Opportunities for yield arbitrage
Yield divergence. S-REITs have re-rated strongly YTD on the risk rally but the gains haven’t been equally distributed. We are seeing some interesting pockets of yield divergence. Using consensus estimates, Suntec REIT is trading at a 300 points yield premium to CapitaCommercial Trust (CCT) despite support from its retail portfolio and fairly similar gearing. Similarly, consensus DPU estimates for Suntec and K-REIT are identical over FY09-10, but Suntec still trades at a significant yield premium. Part of the premium, in our view, is driven by expectations of an equity issue. Meanwhile, CDL Hospitality Trusts is trading at a 260 basis points premium to Ascott Residence Trust (ART). Gearing and geography may play a part here.
Outlook driven? There is also some notable yield divergence between sectors. Pure foreign plays (excluding Saizen and First REIT) are trading at an average consensus yield of 8.8% versus the office REITs at an average of 10.1%. This is an interesting discrepancy that is overriding the typical country risk premium that is awarded to some of those names. Industrial and office REIT yields are at par on average, but average price to book is 0.7x for the industrials versus 0.5x for the office owners.
Arbitrage opportunity. Economic data is still really sideways, in our view – there is some recovery and bottoming out thanks to stimulus efforts but private sector and consumer activity is still a question mark. As such, we don’t expect much capital appreciation for the sector ex major news flow. We do expect opportunities for yield arbitrage as the divergence corrects, especially as clarity increases on the office outlook.
Rights issues, repackaged. Recent activity in the sector includes equity issues (A-REIT, round two); acquisitions (Suntec and K-REIT); and a combination of both (Fortune REIT). Things don’t change as much as branding does: managers will toss around buzz words including “position of strength” and “acquisition opportunities” but the end result will be the same: further equity issues. This is not always a bad thing, in our opinion, as either avenues of growth open up or gearing is lowered (still desirable). We expect more activity as: 1) managers exploit significant re-rating; 2)laggard REITs start de-leveraging; and 3) managers resort to inorganic options to propel the next leg of DPU growth, or even to sustain DPU. We identify Suntec, Mapletree Logistics Trust and Frasers Centrepoint Trust as likely candidates for an equity/acquisition two-for-one in the next six months. Maintain NEUTRAL; top picks are CCT and ART.
Suntec – DBS
Strengthening foothold in the Marina area
• Maiden exposure to Suntec Convention
• Long term strategic rewards offset near term neutral earnings impact
• Maintain Buy with TP of $1.18
Takes 20% stake in Suntec Convention. Suntec is investing S$25m for a 20% share of ARA Harmony Fund, a private equity fund set up to own the Suntec Convention Centre. Under the terms of the agreement, Harmony will pay S$235m for the landmark asset with c.1msf of convention space. The fund will be managed by listed ARA Asset Management via asset and convention and exhibition service agreements.
Small investment, strategic positioning. Although the purchase is not expected to have any significant impact in the near term, we view this acquisition positively given i) firstly, it would deepen the group’s presence in the rapidly expanding convention hub in the Marina area; and ii) secondly, an effective controlling ownership of the entire Suntec City mixed development asset could open opportunities for future enhancements in the long run. Furthermore, we see potential for further streamlining of ownership that would provide Suntec with more synergies and economies of scale. In terms of financial impact, this purchase will raise Suntec’s leverage ratio marginally from 33.9% to 34.2%.
Maintain Buy. Suntec’s valuation remains inexpensive with at 0.55x P/bk NAV and DPU yield of 9.8-8.1% over FY09-10, even after assuming further rental depreciation of office rentals. Our DCF-backed TP of $1.18 offers 17% upside.