Suntec – CIMB
Retail kicker in 2010
• Above expectations. 2Q09 results exceeded both the Street and our expectations on a stronger topline, better net property income margins, and lower interest expense. Distributable income of S$47.7m (+14% yoy) and DPU of 2.98cts (+7% yoy) form 32% of our full-year forecasts. 1H09 DPU of 5.9cts also exceeded expectations at 64% of our FY09 forecast. Net property income of S$48.8m (+6% yoy) was boosted by positive reversions for Suntec City and Park Mall properties.
• Office occupancy down 2.6% pts qoq. Committed occupancy for the office portfolio was 94.8%, down from 97.4% as at Mar 09. This was mainly due to lower occupancy at Suntec Offices of 92.5% (from 96.3% in Mar 09) when major tenants IDA and UBS returned a total of 60,000sf of space during the quarter. Negotiations for part of the space with prospective tenants are ongoing. Leases secured for the quarter averaged S$8.24psf (-17% qoq).
• Retail occupancy stable. Committed occupancy for the retail component averaged 98.4%, down marginally from 98.8% in the last quarter. Leases secured for the quarter averaged S$10.98psf (-1%).
• Asset enhancement work for Suntec City. The manager has commenced asset enhancement work in Suntec City, including: 1) an upgrading of office lobbies for all five office towers; and 2) the construction of a glass external façade, a covered walkway linking the entrance of the Promenade MRT station to Suntec City Mall, and new retail units along the promenade. The work is expected to be completed by mid-2010, in conjunction with the opening of the Promenade station. The bulk of capital expenditure would be borne by the MCST of Suntec City.
• Maintain Outperform; target price raised to S$1.28 (from S$1.07). In view of the strong 1H, we have moderated our rental decline assumptions by 5-10%; assumed higher net property income margins of 75.5% (from 74.3%); and factored in higher amortisation costs for adding back to distributable income. Our DPU forecasts for FY09-11 rise by 8-20%. Our target price rises accordingly to S$1.28 (discount rate 9.4%), still based on DDM valuation.