Suntec – OCBC

Valuation not compelling

Results are in line. Suntec REIT reported its 1Q07 revenue at S$45.9m; +16.5% YoY and +2% QoQ. Distributable income was equally strong at S$27.0m; +21.7% YoY and +9% QoQ. DPU came in at 1.963 cents; +14.5% YoY and +8.5% QoQ. Growth in earnings was mainly attributed to the acquisition of 12,045sf in Suntec strata office space. This was supplemented by higher rentals from increased office occupancy at Suntec City, higher passing rents of retail space as well as additional incomes from more intensive use of space. Suntec also managed its cost well with cost to income ratio at 24%, as compared to 28% in 1Q06 and 25% in 4Q06. The results are in line with our estimates.

Outlook remains positive. Suntec continues to benefit from the buoyant office/retail market. Going forward, a substantial portion of its space is coming up for renewal. Suntec’s office portfolio will see about 16% of space up for renewal in 2007, and a further 32% leases up for renewal in 2008. For the retail side, about 16% of space is up for renewal in 2007 and a further 34% of space is up for renewal in 2008. All these renewals are likely to be the key drivers to earnings over the next 2 years.

Continues to acquire strata space. Last year Suntec revealed its intention to acquire all the strata office space that it does not own in Suntec City. To date, it has bought about 26,426 sf of the strata space at about $1,335psf, which has a total value of S$35.5m at property yield of about 4.4% (assuming no gearing). We believe there is no financing issue, as Suntec had earlier placed out about 120m new units at S$1.50. It potentially has a war-chest of about S$300m, assuming that it gears up to 40% for the new acquisitions. Assuming that it manages to buy more space at the same value (i.e. S$1,335psf), we estimate it can acquire about 197,752 sf of space. The issue is whether strata owners are willing to sell out. We estimate there to be over 1.0 m sf of strata space not owned by Suntec.

Raised fair value to S$1.82. In light of the recent high valuation achieved for office and retail space, we have revised up our fair value for Suntec from S$1.57 to S$1.82. At current trading range, the investment case for Suntec is not compelling; its price to book ratio is 1.33 times, and DPU yield is just above 4%. Thus, we maintain our HOLD rating on Suntec.