Suntec – Daiwa

Yield attraction is inadequate

Office-sector and concentration risks still valid

We maintain our 3 (Hold) rating for Suntec and believe the unit price is fairly valued in light of lingering office-sector risks. Suntec has a slightly higher DPU yield (based on our forecasts) compared with other office S-REITs with office exposure, but it also has (arguably) greater concentration risk. We also expect Suntec’s office tenants to feel the pull of the new CBD office supply for FY10-12. 

Even though Suntec has a major retail component to buffer the decline in the office segment, Suntec City Mall is not a defensive suburban mall, in our view, and could face some operational weakness in 2010 when the retail sector resettles after the opening of several major malls (indirect competition for Suntec City Mall) on Orchard Road in 2H09. 

Opportunities and threats

We believe Suntec City‘s strategic location will be a long-term benefit for its core assets, but that the entire development would have to be refreshed and repositioned to stay relevant against newer projects (Marina Bay Sands and the South Beach project). 

Risk of acquiring too soon

We believe the major risk factor would be an over-ambitious acquisition-growth agenda, which could cause Suntec to acquire assets including the Suntec convention centre or MBFC (phase one) before they are suitable (with sufficient income stability and DPU accretion) for injection. 

Marginal DPU-forecast revisions

We have revised up our DPU forecasts by 0.7% for FY10 and 0.6% for FY12, but revised down our DPU forecast by 1.9% for FY11 after fine-tuning our forecast assumptions. We still expect a relatively sharp fully-diluted DPU decline of over 21% YoY for FY10 due to a pick-up in borrowing costs, weaker net-property income and the full-year impact of the S$152.9m private placement done on 22 December 2009. 

Six-month target price lowered to S$1.30 (from S$1.33)

We have lowered our six-month target price, based on parity to our RNG valuation method (a finite-life Gordon Growth model), to S$1.30 from S$1.33. Our core operating-income estimate assumes average (monthly) passing rents of S$7.50 for Suntec City Office Towers, S$10.75 for Suntec City Mall, and S$10.00 for One Raffles Quay (one-third stake).