Brokers’ take

Compiled by Navin Sregantan

SUNTEC REIT | HOLD (MAINTAINED)

JULY 10 CLOSE: $1.96
TARGET PRICE: $2.00

UOB Kay Hian, July 10

The proposed acquisition of 21 Harris Street in Sydney, Australia, will deepen Suntec Reit's (real estatate investment trust) Australia exposure from 11 per cent to 14 per cent of its total assets under management (AUM).

This is in line with management's strategy to deepen the company's presence in existing geographical locations.

Transacted price of A$297 million (S$280 million) is fair and in line with the independent valuation of the completed project by JLL, based on discounted cash flow method and capitalisation approach.

The acquisition is expected to be distribution per unit (DPU) accretive (boosting pro-forma FY2018 DPU by 0.5 per cent).

We raise our FY2020-21 DPU forecasts by 0.6 per cent, after factoring in fresh contributions from the acquired property.

Share price catalysts include contributions from yield-accretive acquisitions and the positive news flow on office and retail capital values, asset enhancement initiatives, tenant movements and renewals, rentals and occupancy.

The suggested entry price for Suntec Reit is $1.82.

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CHINA AVIATION OIL | BUY (MAINTAINED)

JULY 10 CLOSE: $1.30
TARGET PRICE: $1.60

RHB Research Institute, July 10

Although China Aviation Oil's (CAO's) share price has moved lower in line with jet fuel prices, we highlight that profitability of its China jet fuel business is driven by volumes and not so much by the oil price outlook.

During the last one year, CAO's share price has moved in tandem with jet fuel prices.

While an outlook of weaker jet fuel price does limit CAO's ability to grow its trading volumes, it does not impact the profitability of its China jet fuel supply business, which has registered steady volume growth and earns a fixed US dollar per tonne margin.

We remain upbeat on the long-term growth of China's aviation passenger traffic, in line with its rising per capita income and expanding aviation infrastructure.

Despite outperforming the STI by 14 per cent as at Tuesday's close, CAO's stock continues to trade at an FY2020 forward price-to-earnings of 7.9 times. This compares with a conservative estimated FY2020 earnings growth of 7.6 per cent.

The stock also remains cheap when compared with regional and global peers.

Downside risks are lower-than-estimated jet fuel volume growth and opening up of the Chinese aviation fuel supply market, which would put an end to CAO's current monopoly.

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