Month: October 2009
Suntec – CIMB
Holding steady
• Maintain Outperform; target price raised to S$1.43 (from S$1.37). 3Q09 results were in line with Street and our expectations. We remain positive that the opening of the Marina Bay Integrated Resort and new train stations in 2010 will provide catalysts for Suntec’s retail sector.
• In line. 3Q09 DPU of 2.92cts was in line with consensus and our expectations as declining interest base rates mitigated a weaker topline caused by lower occupancy in the office segment. Additionally, lower interest expenses for One Raffles Quay (also due to declining interest base rates) resulted in higher dividend contributions to Suntec REIT’s distributable profit. YTD distributable income of S$141.8m (+15% yoy) and DPU of 8.8cts (+8% yoy) form 81% of our full-year forecasts. We expect 4Q09 topline to dip as this quarter’s lower passing rents kick in and higher interest rates are applied to new loan refinancing that would be drawn down. 3Q09 net property income of S$47m (+3% yoy) was boosted by tighter control of propertyrelated expenses.
• Occupancy up qoq. Office occupancy was 96.4%, up 1.6% pts from 94.8% as at Jun 09. This was mainly due to higher occupancy at Suntec Offices of 94.8% (from 92.5% in Jun 09) as returned space in 2Q09 was gradually filled up. Leases secured for the quarter averaged S$7.30psf (-11% qoq). Including One Raffles Quay, there was only 0.8% of total net lettable area left for renewal in FY09. Retail occupancy averaged 99.1% (+0.7% qoq), while retail rents secured for Suntec City (the main retail component) remained flat qoq at S$10.96psf.
• Opening of Marina Bay IR and train stations could boost retail. We believe the opening of the Marina Bay Integrated Resort by 1Q10 and two new train stations (Esplanade and Promenade Circle Line stations) by 2H10 are wild cards that could boost Suntec’s retail segment. We make no changes to our DPU estimates, but roll our target price one year forward. Our DDM-derived target price rises accordingly to S$1.43 from S$1.37 (discount rate of 8.8%). Maintain Outperform on expectations of retail catalysts.
Suntec – OCBC
Upgrading on relative value
DPU declines QoQ. Suntec REIT (Suntec) posted S$61.9m in 3Q09 gross revenue, up 0.8% YoY but down 4% QoQ. Net property income (NPI) of S$47m rose 3.1% YoY and fell 3.6% QoQ. Suntec will distribute 2.921 S cents per unit, up 2.3% YoY but down 1.9% QoQ. This is the first quarterly decline in distributions after 18 straight quarters of DPU growth since listing. While both revenue and NPI missed the mark, 3Q DPU was 5% higher than our estimate because of lower-than-expected interest costs.
Suntec Office occupancy up. In 2Q09, two tenants re-delivered part of previously-leased space at Suntec City Office Towers (SCOT), driving occupancy down to 92.5% as of June-end. Occupancy has now improved to 94.8% as of September-end. Average achieved rents of S$7.30 per square foot per month are down 11.4% QoQ and 41.9% YoY. We believe we have approached an inflection point where the margin of safety between passing rents on expiring leases and spot rents reverses. The manager said 22.2% of total office NLA (including One Raffles Quay) will expire in 2010.
Playing the long game. Recently 1) Suntec has acquired an interest in Suntec City Convention Centre for S$25m; and 2) the REIT manager has acquired the property manager for Suntec City. In both cases, the seller was Suntec City Development (SCD) Pte Ltd, the original seller of the Suntec City asset at IPO. SCD is slowly reducing its direct exposure to the Suntec City development but affiliated parties own stakes in both the REIT and the REIT manager. From the perspective of Suntec and its manager, these transactions are small but have strategic significance in tightening control over the Suntec City development. This also corresponds with past behavior – Suntec has been amassing strata space at SCOT.
Relative value. Our revised earnings estimates now reflect actual 9M09 figures and incorporate contributions from the Convention purchase. We see relative value versus CapitaCommercial Trust [CCT, HOLD, FV: S$1.13]. Suntec is trading at a 185-basis point discount to CCT based on our FY10F estimates. Gearing for the two is also fairly comparable (34.3% Suntec, 31.2% CCT). Income is also supported by Suntec’s retail portfolio vis-à-vis CCT. We also believe negative office rent reversions are priced in, and the key bone of contention now is how the sub-sector recovers. Suntec is well-positioned to benefit from the revitalization of Marina Bay. Upgrade to BUY with revised fair value of S$1.21 from S$1.00 previously (10.3% total return).
Suntec – BT
Suntec Reit posted distribution per unit of about 2.92 cents for the third quarter ended Sept 30, 2009, up 2.3 per cent from the same period last year. Income available for distribution rose 8.8 per cent to $47.74 million
PST – OCBC
Lowers DPU payout; no forward guidance
Payout down to 70%. Pacific Shipping Trust (PST) posted a 39% YoY increase in gross revenue to US$15.6m and a 30% YoY increase in distributed income to US$4.8m. The gains were due to contributions from the two CSAV vessels acquired in 2008. On a QoQ basis, revenue rose 1.1% and distributed income fell 17.4%. The trust will pay out 0.818 US cents per unit to investors. This is equivalent to 70% of income available for distribution (2Q: 88%) or 43% of cash earnings (2Q: 48%). PST outperformed our estimates for the quarter as we had already priced in rate concessions to charterer CSAV. But these discussions, which began in April, are still ongoing.
No forward DPU guidance. The Board did not give any forward guidance for DPU payout in 4Q09. The manager said it was not customary for PST to provide guidance, and last quarter’s guidance for 3Q09 was only given because of the sudden drop in payout from 90% to 70%. PST is describing the increased retention as a move to “equip [it] with the financial flexibility to seize value-accretive opportunities” in the next 12 to 18 months. Potential targets include the offshore or chemical tanker asset class. At the briefing, the manager said the Board will continue to review the necessity to retain cash based on market conditions and available opportunities. Our take of these actions is a little different: the shipping sector is still in fairly rough shape, and negotiations with CSAV continue. The increased retention, in our view, is PST’s attempt to build up a defensive war chest in case a negative outcome results. In fact, we don’t believe PST is in any position to consider acquisitions until it can resolve the CSAV issue.
Revising earnings estimates. We had previously assumed a 30% rate cut on the two CSAV vessels in effect from 3Q09. We are now stripping out this assumption in view of the uncertain quantum and timing of any rate concession. This does not mean we believe any action is less likely or less significant – if PST agrees to a renegotiation, it could open the floodgates. Its other charterer, sponsor Pacific International Lines, would be justified in also asking for concessions. We now price in the renegotiation risk in our valuation: valuing PST at a 30% discount to our discounted FCFE value for the trust (prev: 20%). We also assume the
70% payout level continues. Maintain HOLD with revised US$0.26 fair value (prev: US$0.27).
FSL – DBS
DPU guidance maintained at 1.50 Uscts
At a Glance
• Results in line with expectations
• Maintain DPU guidance for 4Q09 at 1.50UScts
• FY10F DPU yield of 13%, best visibility among peers
• Maintain BUY with TP S$0.70
Comment on Results
FSLT delivered another quarter of steady results. Revenue of US$24.6m was stable q-o-q, and the Trust generated cash of US$17.6m, 3% higher than the US$17.1m generated in 2Q09. Of this, the Trust will distribute an aggregate amount of US$8m to its shareholders or a DPU of 1.50UScts for 3Q09.
To recap, a DPU of 1.27UScts for the period 1 July to 16 Sep has already been announced for existing shareholders, while the remaining 0.23UScts for the period 17 Sep – 30 Sep will now be paid to both existing and new shareholders (post placement exercise). The ex-distribution date is 29th October.
Recommendation
Of the US$9.6m cash remaining, the Trust will utilise US$8m towards quarterly prepayment of loans, as per the arrangement following the recent two-year waiver it obtained on its LTV covenants. This will reduce outstanding loans to US$493m, and gearing now stands at 1.3x. Elsewhere, the manager has reiterated that all advance lease payments have been prompt until October 2009 and no request for renegotiation has been received. Hence, risks at FSLT continue to be well managed.
While DPU guidance for 4Q09 has been maintained at 1.50UScts, we continue to project a conservative 1.40UScts DPU per quarter in FY10, given the higher interest costs to be incurred hereon. The Trust is still trading at 13% FY10 dividend yield, more secure and more attractive compared to its peers. Further, the placement proceeds of US$28m, raised during 3Q09, will provide management with a lever to pursue DPU-accretive growth. Thus, we continue to maintain BUY at an unchanged TP of S$0.70.