SUNTEC REIT

SUNTEC REIT | ADD

TARGET PRICE: $2.08

JULY 26 CLOSE: $1.86

CGS-CIMB, July 25

Suntec Reit reported a 3.7 per cent rise in Q2 revenue to $90.5 million from last year, thanks to higher contributions from Suntec Singapore Convention and 177 Pacific Highway in Australia, while distributable income remained flat year over year (yoy).

However, distribution per unit (DPU) of 2.47 cents was 0.8 per cent lower yoy due to lower net property income margin, higher interest cost and an expansion in the unit base from the conversion of bonds earlier this year.

Suntec Reit's improved demand for office space is in tandem with the office market recovery. Additionally, rising tenant sales and shopper traffic have boosted retail performance. The reit achieved a retail portfolio committed occupancy of 98.6 per cent in Q2 and signed 179,000 sq ft of leases. Retail rental revenue rose 2.4 per cent yoy to $30.3 million.

Looking ahead, Suntec Reit plans to enhance the value proposition of Suntec office through an upgrading exercise. We adjust down our FY19-20F DPU estimates marginally post-results to factor in the higher sinking fund contributions at Suntec City. Accordingly, our target price is lowered slightly.

Suntec Reit's retail leasing operations are recovering and its office rental income should continue to benefit from the rising office rents here. Downside risk includes faster-than-expected rise in interest rates.

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