Suntec – DBS

No surprises

Story: Suntec’s 20% yoy jump in topline to $61.4m was in line with street estimates, lifted by positive rental growth and contributions from ORQ. NPI grew by a stronger 25% thanks to a lower expense ratio of c26% during the quarter. As a result, distribution income surged to $43.9m (DPU: 2.85cts). The group revalued its properties up by 6.5%, translating to a book NAV of $2.26. Its 1/3 share in ORQ was also revised up to $2719psf.

Point: The group continued to enjoy positive rental reversions from its new and renewal office leases at Suntec and Park Mall as average passing rents are still significantly below current asking levels. Meanwhile, retail rents have also continued trending up on the back of AEIs and organic improvements. Going forward, the office leasing market has grown more challenging with moderating demand and slower economic growth. An estimated 30% and 24% of portfolio NLA is due to be renewed over FY09-10. While rents and occupancy are likely to come under pressure, the large gap between new and previous levels should partially offset the slack in income. With retail operations anticipated to be increasingly competitive and with c42% of retail leases up for renewal in FY09, we believe growth in retail revenue, which accounts for 57% of topline, is likely to decelerate. In tandem with the slower environment, plans to redevelop Park Mall are shelved in view of the dampened industry and credit environment, as is the move to acquire additional strata units at Suntec office. While gearing is not high at 32%, refinancing activities will be focused on with $825m of debt (44% of total) maturing next year, largely at Dec 2009.

Relevance: Suntec is offering FY09 and FY10 DPU yield of 14-16% and 0.3x P/bk NAV, in line with other office and retail S-reits. While valuations are compelling, given the lack of near term drivers, we maintain our Hold call with a target price of $0.88, based on a 20% discount to RNAV of $1.10.