We do agree with Maybank KimEng that Suntec REIT is not a good buy at this moment. Beside valuation issue, there are couple of items we want to highlight:
Please take a look at the below comparison table with other Retail REIT (beside office, Suntec also own retail properties, hence we lump them together with the other retail REITS instead. This difference will not change our conclusion)
| 2015 Financial Statements | Starhill | FraserCentre | CapitalMall | SPH Reit | Suntec | LippoMall |
| Stock Sticker | P40U.SI | J69U.SI | C38U.SI | SK6U.SI | T82U.SI | D5IU.SI |
| No. of Shares | 2.15E+09 | 9.16E+08 | 3.46E+09 | 2.52E+09 | 2.51E+09 | 2.72E+09 |
| Price | 0.74 | 1.875 | 1.9 | 0.925 | 1.545 | 0.305 |
| Dividends | 1.10E+08 | 9.54E+07 | 3.75E+08 | 1.50E+08 | 2.30E+08 | 6.80E+07 |
| Net Income | 1.09E+08 | 8.51E+07 | 4.52E+08 | 1.25E+08 | 2.21E+08 | 5.93E+07 |
| Finance Expense | 3.06E+07 | 1.85E+07 | 1.14E+08 | 2.19E+07 | 7.56E+07 | 3.44E+07 |
| Performance Fee | 1.48E+07 | 6.49E+06 | 4.17E+07 | 1.71E+07 | 4.33E+07 | 9.41E+06 |
| Total Assets | 2.96E+09 | 2.52E+09 | 9.86E+09 | 3.27E+09 | 8.60E+09 | 2.02E+09 |
| Equity | 2.03E+09 | 1.70E+09 | 6.28E+09 | 2.35E+09 | 5.42E+09 | 1.15E+09 |
| Current Debt | 1.24E+08 | 9.50E+07 | 7.62E+08 | 0.00E+00 | 0.00E+00 | 1.99E+08 |
| Total Debt | 8.43E+08 | 7.39E+08 | 3.17E+09 | 8.43E+08 | 2.98E+09 | 6.23E+08 |
| Free Cash Flow | 1.41E+08 | 1.00E+08 | 4.09E+08 | 2.25E+08 | 1.96E+08 | 1.08E+08 |
| Revenue | 1.95E+08 | 1.49E+08 | 6.59E+08 | 2.23E+08 | 2.82E+08 | 1.37E+08 |
| Dividend Per Share | 0.051 | 0.1 | 0.11 | 0.06 | 0.09 | 0.03 |
| Book Value Per Share | 0.94 | 1.85 | 1.81 | 0.93 | 2.16 | 0.42 |
| P/E | 14.62 | 20.17 | 14.55 | 18.58 | 17.52 | 13.97 |
| Yield | 6.90% | 5.60% | 5.70% | 6.50% | 5.90% | 8.20% |
| P/B | 0.78 | 1.01 | 1.05 | 0.99 | 0.71 | 0.72 |
| P/Free Cash | 11.28 | 17.12 | 16.09 | 10.35 | 19.79 | 7.66 |
| Net Margin | 56% | 57% | 69% | 56% | 78% | 43% |
| ROE | 5.40% | 5.00% | 7.20% | 5.30% | 4.10% | 5.20% |
| ROA | 3.70% | 3.40% | 4.60% | 3.80% | 2.60% | 2.90% |
| Interest Coverage | 3.57 | 4.61 | 3.97 | 5.72 | 2.92 | 1.72 |
| Average Rate | 3.62% | 2.50% | 3.60% | 2.60% | 2.54% | 5.52% |
| Debt/Equity | 0.41 | 0.44 | 0.5 | 0.36 | 0.55 | 0.54 |
| Expense Ratio – Income | 13.60% | 7.60% | 9.20% | 13.70% | 19.60% | 15.90% |
| Expense Ratio – Revenue | 7.60% | 4.30% | 6.30% | 7.70% | 15.30% | 6.90% |
| Expense Ratio – Assets | 0.50% | 0.26% | 0.42% | 0.52% | 0.50% | 0.47% |
| Debt/Dividends | 7.68 | 7.74 | 8.44 | 5.61 | 12.94 | 9.16 |
| Property Yield | 6.60% | 5.90% | 6.70% | 6.80% | 3.30% | 6.80% |
| Leverage Ratio | 1.5 | 1.5 | 1.6 | 1.4 | 1.6 | 1.8 |
| Sales Turnover | 0.07 | 0.06 | 0.07 | 0.07 | 0.03 | 0.07 |
Things that are not good:
- Low property yield of 3.3% versus the rest at ~6.5%. This means they are generating only gross rent of $3.3 per $100 dollar of assets before deducting management fees and other expenses. That is low compare to rest which are essentially double
- Yield is 5.9% versus 3.3% property yield indicating low price/book value. Either they are overstating their book value or the market is not valuing their book value that much.
- High debt/equity
- Low interest rate coverage. It will be most sensitive to interest rate hike in future which means much lower distribution to shareholders.
- Management pay themselves alot more than the rest. There are the highest paid from the perspective of generated income at ~20%.
We will not be touching this REIT unless it crash drastically in price. We might purchase it opportunistically assuming its financial strength does not deteriorate further.
What are your views?
The Valumetrics Team
Suntec REIT (SUN SP) – Unjustified Valuations
Maintain SELL & SGD1.33 TP
- We are negative on Suntec REIT as 23% of its office leases will expire this year. This may force it to lock in unfavourable rents in a year of oversupply.
- We expect vacancy to rise given its large exposure to weakness in the financial sector.
- While management could use part of its proceeds from the sale of Park Mall to cushion a fall in distribution, we caution that this is not reflective of its underlying business performance.
- Unitholders will also assume higher risks from the redevelopment of Park Mall, which it retains a 30% interest.
- Our TP of SGD1.33 remains based on an FY16 yield target of 7.25%.
Highest Exposure To Market Weakness
- With 23% of its office leases due to expire this year, Suntec REIT may be forced to accept unfavourable rents in a year of oversupply.
- We expect CBD vacancy to rise above 11% by end-2016 and rent declines to accelerate.
- Furthermore, exposure to weak hiring sentiment in the financial sector is high, at 48% of its office income.
DPU Not Supported By Underlying Strength
- We expect management to use part of its proceeds from the sale of Park Mall to cushion income losses. However, we caution that DPU distribution will not be reflective of its underlying business performance.
- Unitholders will also assume higher risks from the redevelopment of Park Mall, which it remains a 30% interest.
- Current valuations not justified Suntec trades at a narrower yield than sector benchmark, CapitaLand Commercial Trust (CCT SP, HOLD, TP SGD1.25). We think this is not justified, as prospects for the latter are clearly more favourable.
- CCT is our preferred exposure to office REITs.
Valumetrics.co 
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