- Keep NEUTRAL and SGD1.47, 6% upside. 4Q DPU was in line, but operational performances surprised on the upside on strong rent reversions and occupancy boosts. Market concerns over asset value declines and potential gearing breaches proved unfounded, as Singaporean asset values rose – more than offsetting overseas weaknesses – but the outlook is moderated by a mix of slowing demand, cost pressures, and steep interest cost rises. While valuation remains inexpensive, Suntec REIT’s relatively low hedge position and exposure to the tech sector makes it vulnerable.
- Operational numbers surprised on the upside, but there is a slowdown ahead. Committed occupancy rose to record levels for Suntec City Office (99.9%) and One Raffles Quay (100%) while Marina Bay Financial Towers 1 & 2 fell 4.4ppts to 94.1% as Standard Chartered gave up c.184,000sq ft of space, 80% of which are already backfilled. Australian assets saw sharp 2.4ppts QoQ improvements in occupancy while high UK occupancy was maintained. 4Q rent reversions for Singapore offices improved to 7.7% while Australia saw a strong 24% rent growth in FY22. Despite high tech tenant concentration in its office portfolio (c.26%) management expects occupancy and office rent reversions to stay positive. 4Q retail occupancy rose 1.5ppts QoQ with a healthy 10.6% rent reversion. The convention segment rebounded strongly with a 275% revenue increase in 2H.
- Asset values held firm. Australia and UK asset values declined 2-6% due to anticipated lines on a c.20-30bps rise in cap rates. The Singapore portfolio rose 3.3%, aided by operational improvements and a c.5bps cap rate compression based on a strong office transaction market. This, along with lower overall debt on the back of a weaker GBP and AUD, resulted in lower gearing of 42.4% (FY22: 43.7%). The interest cover ratio fell to 2.4x amid rising interest cost pressures, and is expected to remain elevated in FY23 – with the full impact of rising interest rates kicking in. Overall financing costs in FY23 are expected to climb to c.3.6% (2022: 2.94% pa). Management guided that every 100bps increase will result in c.21% DPU impact. SUN remains on the lookout for divestments in Singapore and Australia, but only at the right price, which we believe is above book value.
- SUN guided for a no income top-up, as the REIT plans to conserve cash and equity in the current environment. It still has SGD23m in past divestment gains that management had earlier indicated to distribute this year. Management fees in units will be 50% moving forward instead of 30% in the past – this is to limit dilutions to unitholders.
- We fine-tune FY23F-24F DPU by -1% to 1%. As SUN’s ESG score of 3.1 out of 4.0 is a notch above the country median, we apply a 2% premium DDM-derived fair value to derive our SGD1.47 TP.
Source: RHB Research - 25 Jan 2023
