• Suntec REIT's 2Q18 DPU of 2.474 Scts (-0.8% y-o-y) in line with expectations. 
• But underlying DPU down 4.2% y-o-y largely due to transitionary downtime at Suntec Office. 
• Suntec City Mall's turnaround continues with 2Q18 NPI up 2.4% y-o-y, tenant sales rising 5% and mid-single-digit rental reversions. 
• Remains leveraged to the upturn in Singapore office rents. 

Market Turning Around to Our Expectations

We maintain our BUY call on Suntec REIT (Suntec) with a Target Price of S$2.30.

Since the start of the year, two other sell-side analysts have joined us in being bullish on Suntec. As CEO Mr Chan Kong Leong orchestrates the sustained turnaround of Suntec City Mall, spot office rents maintain their upward trajectory and underlying DPU improves, we believe more investors and other sell-side analysts will become convinced that Suntec is undervalued. 

Where We Differ – Street-high Target Price

We have a street-high target price of S$2.30 compared to consensus target price of S$1.88. We believe Suntec REIT deserves to trade towards our target price, given office buildings and shopping malls in Singapore have been recently sold on 1.7-2.7% and 3-4% exit yields respectively, below the cap rate of 3.75-4% and 5% used to value Suntec’s office and retail properties.

Furthermore, with office rents expected to be on a multi-year upturn, this typically coincides with office REITs such as Suntec, trading at a premium to book.

Finally, our Target Price is pegged to a price which would allow any potential bidder to generate a 10% IRR. While we are not privy to any potential takeover offers, our analysis was done to reflect market speculation of a Suntec REIT privatisation over the years. 

Closing the Rental Gap

Passing rents at Suntec City Mall of S$10-11 psf/mth are at a significant discount to other suburban malls of up to S$17-18 psf/mth. We believe as Suntec remixes its tenant mix and picks the low-hanging fruits such as placing children stores next to the playground rather than at opposite ends of the mall, the resultant higher foot traffic, tenant sales and improving rents should act as re-rating catalysts. 

Valuation: 

We maintain our DCF-based Target Price of S$2.30. With over 25% total return in the coming year, we reiterate our BUY call. 

Source: DBS Research - 26 Jul 2018