Suntec REIT

Price target:

CGS-CIMB “add” $1.73

DBS Group Research “buy” $1.81 OCBC Investment Research “buy” $1.57 UOB Kay Hian “buy” $1.72

London acquisition seen as positive

Analysts have given the thumbs-up to Suntec REIT for its $756 million acquisition of properties in London announced on Oct 8, noting the “strategic fit” to its current Singapore and Australia portfolio and that it is yield-accretive.

Chong Kee Hiong, the CEO of Suntec REIT’s manager, says that the net property income yield of 4.6% will provide a distribution per unit (DPU) accretion of 4.9% upon the completion of the acquisition in December 2020.

“We like the location and quality of the Nova properties but think that Suntec REIT’s higher gearing could be a drag on near-term share price performance,” wrote CGS-CIMB’s Lock Mun Yee and Eing Kar Mei in their Oct 9 report, where they raised the target price to $1.73 from $1.70 while keeping their “add” call.

“Re-rating catalyst could come from better clarity on its acquisition funding strategy. Downside risks: higher-than-estimated rental waivers to retail tenants,” they add.

DBS analysts Rachel Tan and Derek Tan have maintained their target price of $1.81, which “implies 0.87 times price to net asset value (P/NAV) which is close to its historical mean and 4% dividend yield”. They believe that the addition of quality assets with an 11.1-year weighted average lease expiry (WALE) to the REIT’s portfolio adds income visibility and reduces near-term earnings risks.

The analysts believe that the DPU-accretive acquisition will also drive the REIT’s underlying DPU growth and further reduces the reliance on its capital distribution.

“The long WALE and 100% committed occupancy will provide stable earnings contribution from the asset. In addition, possible upside could be derived from rent review generally every five years at market or existing rent, whichever is higher,” they say.

The team at OCBC Investment Research has also maintained its fair value (or target price) at $1.57. While the team sees the acquisition as having “more positives than negatives”, they feel that equity fund-raising risks remain.

“Management highlighted that its longer-term aggregate leverage target remains at 42-45%. Besides equity, another funding option could also be the issuance of perpetual securities. This would reduce the accretion level of the acquisition,” they say.

UOB Kay Hian analysts Jonathan Koh and Loke Peihao say that this is an “opportune time” to invest in Suntec REIT, as the REIT’s three newly completed buildings — 9 Penang Road in Singapore, 477 Collins Street in Melbourne, and 21 Harris Street in Sydney — will add to its full-year contributions for 2021.

They have upgraded the counter to “buy” from “neutral” with a lower target price of $1.72, from $1.99 previously. — Felicia Tan