Suntec – OCBC

Mixed outlook

• 4Q14 DPU marginally up by 0.6% YoY
  
• Office segment outperforming retail
  
• Valuations unexciting
  

4Q14 results within expectations

Suntec REIT reported 4Q14 revenue of S$76.8m, an increase of 7.3% YoY. This was largely due to the opening of Suntec Singapore, completion of Phase 2 of the AEI at Suntec City mall and stronger contribution from its office segment. DPU was up marginally by 0.6% to 2.577 S cents and was in-line with our expectations. For FY14, revenue rose 20.6% to S$282.4m, or 2.4% above our forecast. DPU of 9.4 S cents translated into a growth of 0.8% and formed 100.9% of our FY14 projection.

Leasing progress for Phase 3 of Suntec City mall still muted

Management updated us that the committed occupancy for Phase 3 of Suntec City mall’s AEI came in slightly above 70% as at end FY14, as compared to 60% in 3Q14. This is a concern to us as TOP is expected to happen soon. We believe progress has been hampered by the tough leasing environment due to retail sector headwinds. Overall committed occupancy for all phases of the Suntec City AEI was 91.3%, with a committed passing rent of S$12.27 psf pm. On the other hand, Suntec REIT’s office segment continued to drive its growth, clocking in a committed occupancy rate of 100%. Average rental rates of S$8.92 psf pm were secured for leases signed in 4Q14, a healthy level, in our view, as Suntec REIT is still delivering positive rental reversions for its new office leases. Outlook for its office segment remains robust in 2015.

Maintain HOLD

We lower our FY15 DPU forecast by 5.9% and introduce our FY16 estimates. As we roll forward our valuations, our fair value estimate is lowered from S$1.90 to S$1.86. With a forecasted FY15F distribution yield of 5.1%, we believe valuations do not excite, as this is close to 1.5 standard deviations below Suntec REIT’s 5-year average forward yield of 6.2%. We thus maintain our HOLD rating on the stock.