Suntec – DMG

Turning Point

1Q12 results within expectations. Suntec (SUN) released its 1Q12 results yesterday, posting gross revenue and distributable income of S$73.3m (+20.1% YoY) and S$54.9m (+3.8% YoY) respectively. DPU for the period came in at 2.45S¢, accounting for 25.3% of our FY12 DPU forecast. NPI increased by 5.0% YoY bringing it to S$49.0m on the back of high occupancy rates and additional income from Suntec Singapore. Going forward, we expect SUN’s DPU to drop slightly amid the loss in income from the divestment of CHIJMES and lower income contribution from Suntec City as a result of the AEI which will begin in June. Based on our DDM valuation (COE:8.9%; TGR:1.5%) we maintain BUY on this counter with a lowered TP of S$1.51. SUN is currently trading at 6.0% spread to 10-year bond yield which is 108bps and 363bps above its long term (4.9%) and pre-crisis mean spread (2.4%) respectively, our TP of S$1.51 translates to a spread of 4.9% and a potential upside of 17.5%.

Proceeds from CHIJMES used for AEI and mitigate dips in DPU. As part of the company’s proactive asset management strategies in maximising returns from the portfolio, Suntec divested CHIJMES for a price of S$177.0 million, 23.2% higher than valuation. According to management, the proceeds will be deployed to partially fund the AEI at Suntec Singapore and Suntec City Mall, and to mitigate any temporary dip in distribution per unit during the execution of the AEI from June onwards.

Gain in revenue offset by lost in income. Going forward, as ORQ and MBFC continue to outperform the general office market, together with additional income from Suntec Singapore in the 1H12, we expect SUN’s DPU to drop mildly by 2.8% in FY12. In our forecast, we expect most of the lost in income due to the divestment at CHIJMES and the AEI at Suntec City to be offset by the gain in income from the abovementioned. Given that this counter is currently trading at 0.65x P/B together with a forecasted yield of 7.5% for FY12, we believe our TP of S$1.51 which translates to a spread of 4.9% is undemanding.