Share price: SGD1.51
Target price: SGD1.75 (from SGD1.83)
Look For DPU Growth In FY14-15
First foray Down Under. Suntec REIT recently inked agreements to acquire 177-199 Pacific Highway, a piece of freehold land and property to be developed for a total consideration of AUD413.19m (~SGD490m). Pacific Highway is a 31-storey, Grade A state-of-the-art commercial tower, with an NLA of 423,915 sq ft and scheduled for completion in early 2016. The project is 100% pre-committed with the Leighton Group, one of Australia’s largest building, contracting and property development group, taking a head lease of 76% of the NLA and WALE of approximately 10 years.
Yields are attractive... Upon completion of Pacific Highway, the initial NPI yield is 6.89% and there will be coupon payments of 6.32% pa to Suntec during the construction period (based on progressive payments to the vendor). The acquisition will be fully debt-funded by a SGD500m 5-year unsecured loan facility provided by the Commonwealth Bank of Australia, DBS Group and Standard Chartered. Compared with Suntec’s FY12 portfolio yield of ~3.6%, the Australian acquisition does appear favourable with near-term borrowing costs unlikely to exceed the ~6% range, thus generating positive carry on this transaction (excluding forex considerations).
…but strategic focus and forex risk in question. Nonetheless, we remain wary of future forex risks on both income streams (revenue in AUD but distribution paid in SGD) and balance sheet (asset purchased in AUD but loan facility in SGD). The AUD is closely tied to the commodity cycle and demand from China. In its announcement, Suntec did not say if these were hedged. Moreover, the viability of its geographic expansion strategy remains to be seen with only one acquisition in Australia (~5.6% of GAV). Aggregate leverage will also escalate to 42.3% from 38.6% currently, making it the second highest-geared S-REIT after K-REIT. We believe the market would initially react negatively to this move, given the abovementioned overhangs and the fact that the acquisition was made in a rising interest rate environment, which tends to correlate with higher cap rates and lower property values.
Reiterate BUY. All told, our investment thesis on Suntec remains intact. After all, it is one of the very few S-REITs whose DPU still posts a CAGR of 9% from 2013-2015 (17.8% over two years) in a growth-limited environment. This is thanks to positive rental reversions from the major overhaul at Suntec City. The stock currently trades at a forward DPU yield of 6.1% and a P/BV of 0.74x. Maintain BUY with a reduced TP of SGD1.75.
Publish date: 06/12/13