Suntec REIT - Highest yield play among peers

Suntec is the only large cap REIT that has not done any pre-emptive rights issue. As a result, it has not been hit with the DPU dilution seen among its peers. While we recognised the merits of a strong balance sheet to cope with potential asset devaluation and achieved better credit ratings, the sharp plunge in office rentals in 1Q09 appears to have moderated in 2Q09. We expect rental income to remain resilient on the back of positive reversion in office sector, while the retail component should benefit from the opening of two nearby MRT stations on the Circle Line and the increased footfalls from the opening of the Marina IR.

Huge upcoming supply in the office sector (9-10m sqft) over the next four years and weak demand will continue to put pressure on office rentals. The impending new supply represents a 14% increase of the existing office stock. The market is currently factoring into a 50% decline in office rents from peak to trough and 15% vacancy levels. We believe this is well reflected in the stock's valuation, currently trading at 0.5x P/Book. Suntec's well diversified asset base and mix of office/retail space provides a resilient earnings base. Its one-third stake in One Raffles Quay, representing 20% of asset portfolio, will enjoy income support till end-2011.

REITs have rallied more than 50% off their March lows as re-financing concerns were allayed by the slew of right issues carried out in the first half of the year. With sector yields trading at 5-6% spread over government bonds and the low rates on savings deposits, we see REITs as good alternatives to improve yields on cash holdings. Developer stocks have rallied strongly on the back of strong housing data in the residential market; REITs are relative laggards in this regard and still offers decent valuation. We like Suntec for its quality asset portfolio, high yield, and as a potential beneficiary of the increased footfall resulting from the opening of the Marina IR.

Stock is currently trading at 11% yield. We provide an estimate of the price levels at various yield assumptions. We see fair value at $1.10 based on 9% FY09/10 yield, representing 17% upside. Buy.

Sponsored Links

Related Posts by Categories