Thursday, November 21, 2013

Suntec REIT - Maiden voyage (CIMB)

Suntec REIT -
Current S$1.57
Target S$1.91
Maiden voyage

We see no reason to continue being negative on Parkson following the recovery in Malaysia's profitability, although it is still not fully back to normal. Management is positive on 2H and the trends this quarter suggest that the optimism is justified. 1QFY6/14 core net profit was in line at 24% of our and consensus FY14 estimates. We trim our estimates by 1% on housekeeping matters. We upgrade to an Outperform from an Underperform on the back of Malaysia's recovering profitability and depressed share price. Our target price is raised as we roll over to 20x CY15 P/E (prev. 22x CY14), in line with regional peers. Catalysts are improving sales figures.

This acquisition could boost SUN's DPU by 4.7% with stable long-term income. However, 1) the resulting higher net gearing level, 2) foreign currency exposure and 3) forecasted yield from this property based on a higher-than-current market rental rate, could potentially offset the positive DPU uplift. Maintain Outperform with unchanged DDM-based (discount rate of 7.9%) TP of S$1.91 as we await for more information from the upcoming analysts briefing on Monday.

What Happened
Suntec REIT announced recently, that it will acquire a 31-storey, A-grade commercial tower, located in the North Sydney's CBD area, for a total price of A$413.19m (S$481.3m). The property, targeted for completion in early 2016, is expected to have a NLA of 423,915 sqft, 100% pre-commitment, with Leighton Group - one of Australia's largest property development group, taking a head lease of 76% of property's NLA with a weighted average lease to expiry of c.10 years. Concurrently, Leighton Holdings will also provide a four-year rental guarantee for any vacant space upon completion of the property. During the construction phase, the property will be underpinned by a coupon payment of 6.32% yield p.a and an initial yield of 6.89% upon completion. With the acquisition being funded via a S$500m facility management guided this transaction to be yield accretive, and will increase DPU by c.4.7%.

What We Think
Although we like this acquisition for its high yield, with SUN's net gearing currently at 37.2%, we believe it could potentially rise to c.41.0% post acquisition (42.5% post-Phase 3 AEI at Suntec City). A higher net gearing and foreign exchange fluctuation exposure could potentially mitigate the uplift in DPU. In addition, based on our estimates, an initial yield of 6.89% translates to an expected rental rate of A$7psf/mth - higher than the average A$5-6psf/mth in downtown Sydney. Having said that, the true impact on risks and DPU will be clearer after the upcoming briefing.

What You Should Do
Maintain Outperform as we awaits for more information from the analysts briefing on Monday.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 17/11/13

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