Friday, 5 June 2015

Suntec REIT

UOBKayhian on 5 Jun 2015

FY15F PE (x): 25.3
FY16F PE (x): 21.5

Concerns over Suntec City Mall AEI have been overdiscounted. Phase 3 of the AEI attained TOP in Feb with 80% precommitted occupancies brought the overall committed occupancies for Suntec City Mall to 93.6% (4Q14:91.3%). Overall committed passing rent of S$12.15 psf pm was below the initial guidance of S$12.59 psf pm due to a challenging retail climate. However, we believe that the allure of Suntec City’s enviable position, boosted by the newly-completed South Beach project and proximity to the Esplanade, Promenade and City Hall MRT stations will draw footfall and tenants. The present weak retail environment may see a longer-than-expected asset stablisation period, but prospects for rental strong rent reversions in the next leasing cycle remain intact due to its relatively low passing rents for a better location compared with many suburban malls that have passing rents of over S$15 psf pm. Challenging retail environment, but expect some reprieve in 2H15. Management has raised concerns of an increasingly challenging retail climate, partly attributed to the tightening of labour laws that have contributed towards increased operating costs and a shortfall in visitor arrivals especially, Chinese tourists, with The Singapore Tourism Board’s (STB) latest figures showing a 6% yoy decline in visitor arrivals for 1Q15. However, STB forecasts a 0-3% growth in visitor arrivals for 2015 supported by a slew of events like the 2015 SEA Games, SG50 celebrations, and Formula One. Upgrade to BUY with an unchanged target of S$2.08 post the 14% drop in share price over the past four months. Our valuation is based on DDM (required rate of return: 7.1%, terminal growth: 2.2%).

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