Suntec – CIMB

Higher office revenue boosted distribution

• Results exceeded expectations; maintain Outperform. FY09 DPU exceeded Street and our expectations (107% of our estimate) mainly due to lower-thanexpected  interest expense. As office occupancy strengthened above 95%, we believe management would not be under pressure to cut rents drastically in FY10. We retain our FY10-11 estimates and introduce FY12 estimates. Our DDM-based target price of S$1.59 is intact (discount rate 8.1%). Maintain Outperform as we believe the opening of Circle Line MRT stations next to the Suntec development will boost its retail performance in 2010.

• Full-year DPU of 11.7cts (CIMB-GK 10.9.cts) grew 6% yoy vs. distributable income growth of 13% yoy to S$189.6m. DPU’s weaker growth was due to deferred units paid out to the original vendors of Suntec City. Net property income of S$182.1m was up 5.6% yoy, mainly thanks to higher office rents achieved for Suntec City and Park Mall, including additional revenue from the Suntec City office strata space acquired in 2008. Leases secured in 4Q09 averaged S$7.11 psf, in line with market expectations for Grade A offices.

• Occupancy and rental reversions positive. Office occupancy as at Dec 09 was 96.8%, down 1.9% pts yoy. However, occupancy had improved steadily from its trough of 94.8% in 2Q09. Retail occupancy as at Dec 09 was 98.1%, down 1% pt yoy. With vacancy at less than 5% for both office and retail space, we believe the manager would not be under pressure to cut rents significantly in FY10.

• Assets written down by 3%. Suntec’s portfolio was revalued at S$5.2bn (including One Raffles Quay) as at Dec 09. This was a write-down of S$151m or 3.2% of its portfolio value mainly for ORQ. Valuers applied cap rates of 4.5-4.75% for office valuations, and 5.6-5.75% for retail valuations. Portfolio-wise, Suntec’s offices were valued at S$1,733 psf, and retail space at S$1,833 psf. One Raffles Quay was valued at S$2,100 psf.