Suntec – CIMB

Preparing for darker days

Management is renewing leases to mitigate risks. However, with job cuts only starting to surface and higher asset leverage, downside risks could outweigh upside potential.

4Q11/FY11 DPU is broadly in line with our forecast and consensus at 26%/102% of FY11. We fine-tune our DPU estimates but keep our DDM TP (disc rate 9.8%). We also introduce FY14 numbers. Maintain Underperform.

Too early to turn positive

While 4Q was decent, we remain negative on offices. Positives came from the leasing of more office space vacated by IDA at Suntec City (taking occupancy from 3Q’s 98% to 99%) and higher achieved rents for leases secured in the quarter (S$8.72 psf vs. 3Q’s S$8.41 psf) though we believe 3Q rentals could have been locked in for bigger space. With proactive lease renewals, office leases expiring in FY12 had dipped to 10% of its office NLA from 13% last quarter. However, given limited expiries at ORQ and MBFC, the bulk of renewals are likely to come from ‘older’ Suntec City offices, which we think could face more leasing difficulties in an office slowdown. With job cuts only starting to surface and upcoming supply, we think it’s too early to turn positive.

Suntec City Mall AEI

Suntec City Mall was stable ahead of AEI. Management has signed leases with a few tenants while in advanced negotiations with others. More colour will be provided in 1Q12 results. Management remains mum on expected disruptions but maintains that it will seek to minimise disruption.

Lower aggregate leverage

Aggregate leverage dipped to 39% from 42% the last quarter, on higher asset revaluation with 6-9% increases for key assets on 0-25bp cap-rate compressions and improved property performances. With this, asset valuations have returned to pre-crisis peaks, implying downside risks in a worse slowdown.