Suntec – DBSV

Multi-pronged strategy at work

• No surprises in results

• Growth from organic and inorganic means

• Maintain Buy, TP $1.69

Maiden contributions from MBFC. Suntec recorded distribution income of S$44.9m, -2.8% qoq and –6% yoy, dragged down by slightly lower contributions from both the retail and office properties. While portfolio occupancy improved to 98-99%, impact of negative office reversions impacted bottomline. It renewed/ contracted new leases of 127ksf of retail NLA in Q4 and another c304ksf of office NLA at an average of S$8.16psf/mth, including forward leasing a number of leases due FY11. MBFC1 contributed a maiden S$2.5m. DPU of 2.316Scts (FY10: 9.859Scts) was 20% lower yoy due to a recent placement exercise to partially fund the acquisition of MBFC1. The group took in a S$116.8m revaluation surplus, which lifted book NAV to S$1.78.

Managing organic growth, looking for new acquisitions. Looking ahead, the group will continue to benefit from the rising office market. It has proactively renewed c276ksf of leases expiring in FY11 and has a remaining 164ksf (6.8%) of office space (excl IDA’s 90ksf), and another 276ksf of retail area to be renewed this year. Negative rental reversions are likely to be felt but rising office rents will mean a narrowing of spread between expiring and re-contracted leases. In addition, it is proactively looking for new acquisitions. Its current gearing stands at a healthy 38.4%. In addition, earnings are likely to be boosted by a lower all-in financing cost of 2.8% (vs 3.77% previously).

Maintain Buy. Suntec offers FY11 and FY12 DPU yield of 5.7% or 310bps spread over the risk free rate. The target price of $1.69 translates to a total return of 13%. We believe potential further upside can be realized as he group executes on its organic growth or acquisition strategies.