Target price Remains SGD 1.59
Closing price September 27, 2013 SGD 1.68
Tight margin of safety = fairly priced at best
Action: Neutral; fairly priced at best given tight margin of safety
SUN has outperformed the other REITs year to date (+0.3% vs. FSTREI’s -5.6%). That being said, our estimates suggest SUN’s cost of debt could potentially be significantly higher than its current cost (4.2% vs. 2.7%) in the long run. Assuming the higher cost of debt, all management fees paid in cash and no rental support could shave 2.5pp off SUN’s FY15F yield, on our numbers, and the resulting spread of just 0.5pp over the long-term average risk-free rate of 2.9% appears too tight, in our view. All things considered, we believe the stock is now fairly priced at best.
Catalyst: Suntec office occupancy to remain high despite some potential near-term flux
In our view, incremental leasing demand will continue to be driven by nonbanking sectors and we expect committed occupancy at Suntec City office to remain high. That being said, there could potentially be some flux in vacancy in the near term as some tenants in Tower Five relocate.
Valuation: TP unchanged at SGD1.59
We keep our TP unchanged at SGD1.59. As a cross-check, our TP translates into a P/B multiple of 0.8x based on the end-June book value of SGD2.06, which is a marginal premium to the average multiple of 0.75x that SUN has traded at since 2005.
Our TP of SGD1.59 implies a potential total return of -0.1% (potential downside of 5.4% + FY14F yield of 5.3%). Maintain Neutral.
Publish date: 02/10/13