Suntec – Daiwa

Net-property income weakens

What has changed?

• Suntec announced its 3Q09 results on 27 October. Net-property income (NPI) of S$47m was 2% below our forecast, but distribution per unit (DPU) of 2.75¢ was 22.5% above our forecast.

Impact

• NPI of S$47m declined by 3.6% QoQ. Gross revenue dipped by 4% QoQ with the major weakness coming from its core Suntec City property. Passing (monthly) rents at Suntec City Mall slipped to S$10.96/sq ft for 3Q09 from S$10.98/sq ft for 2Q09. Meanwhile, the manager signed leases at Suntec City
Office Towers for the quarter at an average of S$7.30/sq ft compared with S$8.42/sq ft for 2Q09 and S$9.96/sq ft for 1Q09.

• Much lower-than-expected net-financing cost was the major positive variance. Suntec’s average all-in financing cost as at 30 September 2009 was 2.88%, almost no adverse impact from the financial crisis.

• We have revised up our DPU forecasts by 9.3% for FY09, 1.3% for FY10 and 0.3% for FY11 after lowering our net financing cost assumptions and our NPI forecasts.

Valuation

• On our revised DPU forecasts, Suntec trades at a 12-month forward yield of 7.6%, one of the most attractive in the sector. We have not changed our six-month target price of S$1.16, based on our RNG valuation (a finite-life Gordon Growth Model), which assumes an effective portfolio cap rate of 6.1% (about 100 basis points above the prevailing cap rate).

Catalysts and action

• We maintain our 3 (Hold) rating for Suntec, in view of the discernible decline in NPI and passing rents and a lingering risk of equity fundraising. We expect Suntec’s fully-diluted NAV to decline from S$1.97 as at 30 September 2009 to S$1.45 by end of 2010 (gearing of 41.2%) and S$1.19 by end of 2011 (gearing of 45.6%).