Target (SGD): 2.000
17 Feb price (SGD): 1.665
Remains our top pick
• The uncertainty about the Suntec City AEI was one factor for its valuation discount; its resolution could be a positive catalyst
• As Suntec completes its AEI, we forecast a 2013-16 DPU CAGR of 12.8%, the highest in the S-REIT Sector
• Reiterating Buy (1) rating and 6-month target price of SGD2.00, which compared with a book value of SGD2.13 (as at end-2013)
■ What's new
Despite an 8.1% rise in the unit price YTD in 2014, we believe Suntec REIT (Suntec) remains undervalued, and expect progress on its Suntec City asset-enhancement initiative (AEI) to be a strong catalyst for a continued rerating.
■ What's the impact
We believe ongoing execution (so far successful, in our view) of its AEI for Suntec City will continue to be a unit-price driver this year. The AEI began in June 2012 and is due to be completed by 4Q14. The uncertainty over the AEI since it was announced in October 2011, has been the major factor in the unit price's big discount to Suntec’s NAV, in our view.
We are cutting our revenue forecasts by 5.7% for 2014 and 2.7% for 2015 and our NPI forecasts by 9.1% for 2014 and 6.0% 2015. This is due to a combination of factors, including: 1) the postponement of the assumed completion date for phase 2 of the Suntec City refurbishment from the end of 2013 to the end of 1Q14, 2) our adopting of slightly more conservative office-rental reversion assumptions for 2014 (we now expect negligible rental reversions for leases renewed compared with low single-digit rental reversions previously), and 3) higher assumptions for operating expenses, including property taxes. Overall, we cut our 2014-15 DPU forecasts by 6.3-6.8%.
We maintain our 6-month target price of SGD2.00. Following the cuts to our DPU forecasts, our DDM valuation falls from SGD2.10 to SGD2.00 (but to be conservative, we did not raise our target price for Suntec throughout 2H13 even though our DDM valuation had increased). Our target price represents a 6% discount to Suntec's book value (as at end-2013) of SGD2.13.
■ What we recommend
Suntec remains our top pick among the S-REITs and we reaffirm our Buy (1) rating. We forecast a sector leading DPU CAGR of 12.8% (for 2013-16), with strong DPU growth in 2015, the first full financial year after the Suntec City AEI is completed. The main risks to our view include unforeseen setbacks in its Suntec City AEI or in the office sector rental recovery.
Publish date: 18/02/14