• Keep BUY and SGD1.35 TP, 12% upside with 5% FY25F yield. Suntec REIT's 2H24/FY24 DPU figures slightly missed our estimates. The ongoing privatisation offer deeply undervalues its long-term potential and is unlikely to be successful - but rather sets a floor to its share price. While DPU is set to be muted in FY25F as interest costs peak, the operational performance across its Singapore assets remain solid, and this should continue. Overseas markets, which have been underperforming, are set to bottom out, with improving office outlook and rate cuts commencing.
• We recommend unitholders to reject the low-ball privatisation offer of SGD1.19/share, which values the REIT at a 42% discount to its latest BV. The BV is conservative in our view, considering that its key asset Suntec Office is valued at SGD2,716 psf vs strata Suntec office units that were divested in the market at 20% higher PSF. Offeror Aelios - controlled by Gordon Tang and Celine Tang, together with concert parties - currently has a 33.1% stake in the REIT. We believe the offeror's potential next steps is a likely acquisition of the REIT manager, in order to gain better control over the REIT or push for internalisation to extract value.
• Expect more divestments in FY25 (FY24: SGD58m), with further divestments of strata units at Suntec Office and possibly an Australian asset. The proceeds could then likely be used to pay down the SGD200m perpetual securities that are due on Oct 2025. We believe valuations have bottomed and, as such, are not concerned over SUN's relatively high gearing of 42.4%.
• Rent reversions to stay positive with FY25 guidance for Suntec City mall's rent reversion of 10-15% (FY24: 23.2%), and stable occupancy. Singapore office portfolio rent reversion rates are expected to moderate to 1-5%. Meanwhile, SUN's UK portfolio's committed occupancy rate is expected to increase in FY25, although some leasing downtime is expected. In Australia, the outlook for its Sydney and Melbourne office assets is stabilising and likely to gradually improve, but the Adelaide office market remains a challenge.
• FY24 operational DPU dropped 2.3% YoY due to higher interest costs, FX impact and higher vacancies at two of its overseas assets. Financing cost rose 22bps YoY to 4.06% pa, and we expect it to peak at 4.25% in FY25, as some of the low-cost fixed rate hedges roll off. Its Singapore asset value rose 1.4% YoY, driven by a better performance, while that of its Australia assets fell 11% on 60-75bps cap rate hikes. UK asset value declined by a marginal 1%.
• We trim FY25-26F DPU by 3-4%, factoring in higher financing costs from debt hedges rolling off, and roll forward our DDM valuation by a year. SUN's ESG score stays at 3.3 (out of 4.0), resulting in a 4% ESG premium.

Source: RHB Research - 27 Jan 2025