Brokers' take: Analysts positive on Suntec Reit's sale of Penang Road asset

ANALYSTS are positive on Suntec Real Estate Investment Trust's (Suntec Reit) recently announced divestment of its 30 per cent stake in 9 Penang Road to its joint venture partner, Haiyi Holdings.

In reports issued on Thursday, RHB and Jefferies maintained "buy" on the Reit, while Citi Research reiterated its "neutral" call. All three brokerages have left their target prices unchanged at S$1.72, S$1.75 and S$1.56 respectively.

Citi analyst Brandon Lee noted that the divestment of 9 Penang Road came as a "partial surprise". Suntec Reit's move to sell its stake together with its issuance of S$150 million perpetual securities at a coupon rate of 4.25 per cent suggest that the Reit's management "is prioritising an improved gearing level", he said.

To recap, the agreed purchase price took into account the agreed property value of S$985 million on a 100 per cent basis. This is at a 5.7 per cent premium to the latest valuation of S$931.8 million as at May 1, 2021.

"Post the sale and assuming full proceeds of S$88.2 million are used to pare down debt, Suntec Reit's gearing would improve 1.5 percentage points to 42.9 per cent, which we estimate could be lowered further to 41.5 per cent assuming 100 per cent of the recent perp is used to reduce debt as well," he commented.

Meanwhile, Jefferies' Krishna Guha likes Suntec Reit's focus on enhancing unitholder value through active capital recycling and its efforts to strengthen its balance sheet.

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"While not exactly comparable, (9 Penang Road's) divestment price of S$2,468 per square foot is lower than the S$3,000-plus price achieved in the OUE Bayfront transaction earlier this year and other central business district strata sales," said Mr Guha of the Reit's divestment.

He highlights that although the transaction has no impact on Suntec Reit's distribution per unit on a pro-forma basis, the asset contributed 2 per cent of overall portfolio income in Q1 and an estimated 6 per cent on a stabilised basis.

RHB analyst Vijay Natarajan also expects the market to react favourably to the news as the divestment move "addresses the key issue of its high gearing level by unlocking value from a stabilised asset".

He believes recently tightened measures will have "minimal impact" on the Reit's office portfolio, and anticipates demand for leases to recover and grow in the second half of 2021.

"While the retail and convention segments are expected to remain weak, Suntec City mall's strong attributes and management's proactive tenant engagement should mitigate some of the impact," he opined.

Units of Suntec Reit fell 0.7 per cent or S$0.01 to finish Thursday at S$1.47.

READ MORE:

• Suntec Reit Q1 DPU rises 16.2% to 2.045 Singapore cents on stronger operational performance
• BTExplains: What Suntec Reit's numbers say about risks in the office segment