Broker's take: Jefferies upgrades Mapletree Commercial Trust, Suntec Reit to 'buy'

JEFFERIES Singapore has upgraded its recommendation on Mapletree Commercial Trust (MCT) and Suntec Real Estate Investment Trust (Suntec Reit) to "buy" from "hold".

The brokerage has also raised its price target on MCT to S$2.25, up from S$1.45, and increased its price target on Suntec Reit to S$1.70, up from S$1.25 previously.

This comes as Jefferies Singapore believes that diminishing cases of virus, growing headlines of vaccines, as well as the easing of travel and social distancing norms should lift sentiment and consumption.

In addition, MCT has an "attractive asset portfolio" located next to Southern Waterfront, which is possibly the next central business district with no retail mall in the precinct, wrote analyst Krishna Guha in a research note published on Wednesday.

He added that MCT has a "strong execution track record", where distribution per unit (DPU) has grown more than 40 per cent since its initial public offering, though there is no visible pipeline in the near term.

According to Mr Guha, a pickup in consumer spending and a restart in tourism will help MCT's operating statistics. "While e-commerce and a changed tourism environment will adversely impact sector fortune, MCT's assets are uniquely positioned to weather the slowdown. Valuation is relatively expensive, but asset positioning and execution justifies the premium," he said.

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Compared to MCT, Suntec Reit is more of a valuation call, added Mr Guha.

"We think Suntec Reit's assets are a bit more challenged. Redevelopment of Marina precinct will take time and some of the small and medium-sized enterprises tenants in Suntec tower may give back space.

"However, at 5.6 per cent yield versus 4 per cent for MCT and Frasers Centrepoint Trust, we think the risks are adequately compensated."

Jefferies Singapore has raised its estimate for Suntec Reit's DPU for fiscal 2021 by 45 per cent, and by 28 per cent for fiscal 2022, driven by higher contributions from Suntec City Mall. It has also lowered Suntec Reit's medium-term growth rate to 2 per cent from 3 per cent previously, in line with other Singapore real estate investment trusts (S-Reits) under its coverage.

Following a phased reopening, retail sales in June rose 51 per cent month on month and declined 28 per cent year on year (y-o-y), a much slower pace than the 52 per cent y-o-y decline in May, Jefferies Singapore said. It also noted that inbound tourism has picked up pace, albeit off a low base, as more flights are being restated and green lanes are explored.

In the report, Mr Guha added that the asset values of selected Reits have declined by low to middle single-digit since the last valuation.

"Cap rates are sticky and change in valuation is driven by lower market rents and rental growth assumptions," said Mr Guha.

He added that within the industrial space, more sale and leaseback transactions have taken place, which may reflect efforts by owners to shore up liquidity. "All in, we do expect valuation to evolve as more transactions occur," Mr Guha said.

Units in MCT were trading at S$1.98, down S$0.01 or 0.5 per cent before the midday break, while units in Suntec Reit were trading at S$1.41, down S$0.01 or 0.7 per cent.