Brokers’ take: RHB downgrades Suntec Reit to ‘neutral’ as technology sector slows
Bernadette Toh
RHB Research downgraded its call on Suntec Real Estate Investment Trust (Reit) to “neutral” from “buy” as it expects the Reit to be impacted by slowing growth and rising rates in the technology sector.
The research house slashed its target price from S$1.70 to S$1.47 after lowering FY2023 to FY2024 distribution per unit estimates by 12 per cent, upon factoring in adjusted occupancy and rental growth, higher financing costs, and assuming higher fees in cash.
On Tuesday (Jan 10), analyst Vijay Natarajan noted that while the Reit’s valuation remains “inexpensive” at about a 35 per cent discount to its book value, he sees limited catalysts ahead.
While the analyst observed a slowdown in office demand drivers, he said Suntec City Mall’s performance should remain “relatively steady” with the convention segment expected to rebound strongly in FY2023.
Natarajan anticipates divestments in the near term to lower Suntec Reit’s gearing, while helping to manage interest cost pressures. In his view, the Reit’s gearing of 43.1 per cent is on the high side versus peers and has been a key investor concern.
Despite a weaker UK economic outlook, Natarajan expects negative impacts on the Reit’s overseas portfolio to be partially offset by its Singapore assets, which have seen strong operational improvements. Overseas assets could also be mitigated by long leases with no significant lease expiries or breaks until 2025, he added.
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Similarly, for its Australian assets, the Reit has already secured lease commitments for more than half of 2023 expiring leases.
Natarajan also noted that the valuation of the Reit’s portfolio is unlikely to experience significant reductions as at end-2023, with the gearing ratio to be maintained below 45 per cent.
There is potential for Suntec Reit to divest assets in Australia or pare down its stake in Singapore to lower debt, he added.
“On the foreign exchange (FX) front, it has hedged 61 per cent of its overseas derived income, thereby limiting FX impact.”
Units in Suntec Reit traded at S$1.34, down 2.2 per cent or S$0.03, as at 1 pm on Tuesday.
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