Suntec – DMG
Great connectivity, value not fully appreciated
Raising our target price to S$1.45 from S$1.24. Our DDM-backed target price reflects a lower cost-of-equity assumption of 9.1% (9.6% previously). We raised our FY09 DPU estimates to 10.52¢ from 9.91¢, as we assume 5% rental growth for Suntec City mall (-5% previously). Suntec will be reporting 3Q09 results on 27 Oct and we expect annualised DPU of 10.52¢, a marginal increase over FY08. Maintain BUY.
Healthy leasing activity. For 1H09, Suntec renewed and signed 375,000 sqft of office space. With this, the remaining office leases expiring in FY09 amounts to approximately 84,000 sq ft or 4.5% of the total office NLA. Suntec has seen healthy leasing activity, with eBay/PayPal taking a 28,000 sqft lease in Tower 5 (UBS’s former space). COSL Drilling, Interoil Singapore (oil & gas), Asia Green Capital (investment bank), Dan Bunkering (bunker trader) are among the new tenants at Suntec City.
Still under-rented but positive rental reversion unlikely to transpire. Passing rents for Suntec City office average about S$6/sqft, marginally below spot transactions of between S$6-7/sqft. Management acknowledged that it is clearly still a tenants’ market and the focus on tenant retention remains paramount. In our view, management will likely shift their focus to occupancy optimisation at the expense of rental rates, capping the likelihood of positive rental reversion in the coming quarters.
Retail reprieve on overall earnings. With retail contributing to 53% of overall income, we expect earnings prospects to remain favourable compared to CCT. We believe the spectre of higher retail footfall at Suntec City is likely to transpire when the Circle Line becomes fully operational in 2010. The opening of Esplanade and Promenade stations will materially enhance Suntec’s traffic footfall, a case that is currently seen in ION Orchard mall, given its connectivity with Orchard MRT. At current prices, Suntec offers investors an attractive dividend yield of 8.6% for FY10. Stock traded at 4.6% yield between 2005 and 2007. At our TP of S$1.45, stock still offers attractive yield of 6.5%.