Suntec – DBS

Time is ticking

2Q07 results hit by dilution. Higher office rental revenue (+23%) from both Suntec and Park Mall, with higher occupancy and rental rates as well contributions from Suntec Strata acquisitions and muted retail rental revenue (+0.9%) supported the growth in gross revenue and net property income of 8.1% and 10.3% respectively. Distribution income grew 19.3% yo-y, delivering 2Q07 DPU of 1.965 cents which translates to DPU yield of 3.9%. With the recent private placement of 120m new units (net proceeds of S$176.6m) to fund the buyback programme for Suntec strata units, there was a dilutive negative impact from a larger unit base in the absence of yield accretion coming through with only 30,172 sf of Suntec office strata space (S$40.7m) acquired to date. As such DPU growth of 8.5% y-o-y did not keep pace with growth in distribution income, and was below expectations.

No acquisitions, but value of portfolio value grew. Along with its 2Q07 results, Suntec has revalued its portfolio upwards by another S$613.6m, mainly attributed to Suntec City (office +30%, retail +14%) in addition to the Suntec Strata space buyback which raises portfolio to S$3.8bn and reduce debt to assets ratio to 23.3% from 27.7% in 1Q07, further increasing debt headroom for acquisitions. Accordingly, NAV per unit is raised to S$1.80, from S$1.43 in FY06. Moving forward, we continue to see Suntec as a strong beneficiary of asset reflation, backed by strong rental growth. However, we are cautious on prospects of acquisitions for Suntec, as the strata buy back programme is not gaining pace. Office capital values are on the rise, compressing physical yields with immediate yield accretion prospects looking increasingly remote.

Office rents continue to surge by 20%, within expectations. Office rents in Suntec City continue to surge, achieving rents of S$8.00-S$9.50 psf from S$6.50-S$8.00, within expectations. We reiterate that Suntec continues to be a beneficiary of spillover demand from tight vacancy and bullish rentals in the CBD spilling over to secondary locations.

Maintain Buy, TPS$2.20. While time is ticking with dilution from deferred units soon to take effect in FY08, strong positive rental reversions are expected to outpace the negative effects of dilution for Suntec’s distribution income which we have factored into our DCF projections. Despite the lack of visibility on acquisitions without the backing of a developer sponsor, i) asset reflation remains a key theme for Suntec, ii) retail enhancements well under progress iii) beneficiary of circle line – once completed in 2010-2011 for both the Suntec office and retail portfolios iv) kicker in traffic flow with Singapore’s position as major MICE hub and Integrated Resorts. With target price of S$2.20 backed by DCF valuation unchanged, we maintain our Buy recommendation on Suntec.