Sunday, September 22, 2013

Take research report with a pinch of salt - Case study: Suntec Reit

I used to own Suntec Reit, I would still like to own it if the price is right.

But I saw from a investment website that a certain research company has a price target of $2.01 using a DDM (dividend discount method).

I do not know the metrics used in this DDM calculation, but  I think the research is just too optimistic in its assessment. I think investors should take a conservative target price and not a highly aggressive target price.

First, lets do some reverse engineering.

Assume you think 6% yield for Suntec is cool (After all growth are factored in), given its "blue-chip" status. So you need 12 cent DPU, or 3 cents per quarter. So I would need distribution of about 67 million per quarter. Can Suntec achieve that?

Above is the upgrading plan, they expect NLA to increase by 25% and net net get a 33% increase in gross monthly rent. Lets give the retail revenue a 35% boost.

Let assume also 10% positive rental revision to its Suntec office, MBFC and other Jointly-controlled entities.

At such, the contribution from various units for DISTRIBUTION

SUNTEC retail = 18.75 million per Quarter

SUNTEC office = 19.5 million  per Quarter

Jointly-owned entities = 29 million per Quater

Parklane = 3  million

That is about 70 million, giving you a slightly above 6% yield, after 35% boost in retail contribution and 10% positive rental revision in office for all units.

If such liberal/optimistic assumptions do not pan out, you should be looking at 5-6% yield instead.

Do note, I did not take into account:

1) increase in finance costs with increase in interest rate

2) The increase in increase rate will lead to higher yielding bonds, and if the spread of about 4% is maintained, a 5% yield for a Reit instrument is hardly a sound and prudent proposition.

3) That the phase 4 AEI will complete only in 2015, so the full positive impact of retail reversion should come at 2015 earliest.

If you are happy with 5% yield, and is willing to hold it through thick and think, Suntec does look like a decent buy now, but if you are buying now hoping it will hit $2 in the next 12 months, I think the odds are not in your favor. (But you can be a lucky star and win against all odds)

Also, the research report talk about discount to NAV, I wish to highlight Suntec Cap rate is quite aggressive, and at $2, the discount will disappear.

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