Jefferies upgrades Mapletree Commercial Trust, Suntec Reit to 'buy'

Singapore

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 a slowdown in the spread of the novel coronavirus, news of vaccine developments, 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 the 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.

The MCT-owned mall VivoCity has limited competition, he added, while MCT's acquisition of Mapletree Business City II should offset the negative impact of Covid-19 on VivoCity. "Business park and retail assets will both be impacted by structural shifts, but diversification is likely to keep distribution per unit (DPU) profile stable."

He also said MCT has a "strong execution track record". Its DPU has grown more than 40 per cent since its initial public offering, though it has no visible acquisition 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.

Meanwhile, Mr Guha has turned positive on Suntec Reit due to its valuations.

"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," he said.

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.

In his report, Mr Guha cited data from Colliers showing that take-up of office space was net positive in the second quarter. While the impact of work-from-home policies is still debated, he said the balance of supply and demand is still relatively favourable for landlords.

"With construction delays, upcoming major supply may be delayed. Further, existing supply will be taken out due to redevelopment of projects like AXA Tower and the Fuji Xerox buildings. This should minimise downward pressure on rents (about 5 per cent lower) and keep asset values stable."

Moreover, 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 resumed and green lanes are explored.

Among other things, the brokerage noted that some S-Reits have taken the opportunity to refinance at lower rates. Green instruments are also helping Reits to lower borrowing costs, most notably Ascendas Reit's 10-year bond at 2.65 per cent, Jefferies Singapore said.

In the report, Mr Guha noted that the asset values of selected Reits have declined by low to middle single-digits 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."

Units in MCT closed flat at S$1.99 on Thursday, while units in Suntec Reit finished unchanged at S$1.42.