Monday, October 5, 2009

Suntec REIT a good buy?

I have consolidated some data on REITs in Singapore from 2 sources, Dated 22 and 25 Sep 2009.

Image 1 (For dividend image and gearing)

Image 2 ( For Price to NAV image)

Image 3 (For estimated future Net Asset Value, NAV)

Just to clarify, the first image is take from one report, and the 2nd and 3rd image from another report.

From Image 1, we can see that Suntec has one of highest dividend yield in Singapore. Not considering those REITs that are heavily invested in overseas properties. And at a dividend yield of 8%, its attractive! Considering the low bank interest rates now.

In addition in image 1, we can see Suntec has a gearing of 33.9%. This means that it has a debt to equity ratio of 33.9%. Personally I feel that 33.9% is still a healthy value, meaning Suntec is not taking too much loan/debt. ( A low ratio gearing ratio might mean that the company is not taking enough risks to make $$, but a extremely high ratio could also mean that the company is taking excessive risks! and might not be able to pay back the debt. Therefore how much gearing is good, is subjective.)

From Image 2 and 3, we will be looking at price and net asset value. Suntec has one of lowest Price to NAV according to image 2.

In image 3, this particular brokerage report expects Suntec's NAV to drop heavily because of the investment properties i.e the value of Suntec City,Park Mall. The drop is expected to be around 30%!

As seen from my previous post on brokerage firms, values estimated by brokerage firms should be taken with a pinch of salt. In my personal opinion, I do not feel that the asset value of Suntec's properties will drop by 30% in 3 years! Even if it did drop, I feel that it will not drop by more than 10%. This is because I have faith that the Singapore government will do all in the means to make sure the Singapore economy will do well.

If this is the case, at a present price to book value of around half, we are essentially buying a stock that is suppose to be worth almost twice the amount! ( I.e Suntec is worth $1.98 now, but is sold on the stock market for $1.04)

However the current risks is that property prices might really drop THAT badly and that Suntec might issue rights soon, causing a drop in dividend yield. These are the main risks to consider!

But in my opinion, it would be better to just buy Suntec's REIT stock and hold for the long term. With a dividend yield of the ard 11% ( as of 4th Oct), isn't it a better choice than fixed deposits?


SGDividends said...

Used to invest in REITs and TRUSTs but not anymore.

Somehow, think that it is akin to a type of investment where the high dividend yield is indirectly taken from the the long run..the NAV will fall...So its like putting money in to get back the money in the long run.....

Furthermore, REIT/Trust managers are paid in dilution is pretty high....

Rather put it into companies.


Joe said...

Do take some time to gain an appreciation into the financing models of REITs and Trusts, as well as the strict maximum float SGX rulings that govern these financial instruments which also restrict the growth capability. Also observe the kind of huge payouts to the REIT managers -> this is akin to a certain kind of mutual fund, where the manager need not necessarily have a vested interest in striving for the best yield returns to the investor.

I am a sceptic of things that always look too good to be true, and I might be wrong. Just my personal opinion too.

AK71 said...

Any update on your thoughts regarding Suntec REIT with its planned purchase of 1/3 stake in MBFC?

I have some ideas and would like to share them here with you:


Looking forward to your input. :)


Another great review of a really outstanding company.