Suntec – DBSV

Execution is the key

• 2Q12 results sequentially lower but within expectations

• Leasing activities strong for Suntec Offices, precommitments for phase 1 of the new retail mall at 58%

• BUY, TP raised slightly to S$1.61

Highlights

Results in line. Suntec’s gross revenues and net revenue declined by 3-7% q-o-q as the AEI at Suntec retail mall commenced, as well as an income vacuum from the sale of CHIJMES. The loss of income from the expiry of One Raffles Quay’s (ORQ) income support was partly mitigated by the GST rebates and positive rental reversions. Distributable income was S$53m or 2.631cts DPU (-6.8 y-o-y, -3.7% q-o-q), bringing 1H DPU to 4.814 cents or 54% of FY12 forecast.

Our View

Leasing activities for Suntec offices still strong. Despite weaker market sentiment, office rents at Suntec City held steady at S$8.71/psf/mth vs S$8.79 a quarter ago supported by full occupancy. In total, the trust renewed an impressive 146,456 sf of office space in the quarter, leaving only 2.5% of space to be renewed in 2H12 and is now forward leasing FY13 space.

AEI at Suntec City mall has commenced. As expected, average monthly passing rent for the retail space at Suntec City dropped 8% q-o-q to S$9.35 psf. This was largely due to the closure of Galleria, given its more prime location and we expect further dips as the F&B restaurants and retail space around The Fountain close progressively in the 2H. In total, the affected c.193,000 sf of retail space will reopen in Apr-May 2013 and rents should moved up subsequently. As of 2Q12, c58% of the space has been pre-committed vs 45% a quarter ago and makeover for the whole mall is expected to be completed by 2014 vs the earlier guidance of 2015.

Sufficient funding for Phase 1 and 2. Gearing is at 37.5% and the group has sufficient cash resources from the sale of CHIJMES to fund the capex for the AEI in Phase 1 and 2. Meanwhile, refinancing for its S$200m loan due in Oct should be completed soon.

Recommendation

Maintain BUY. We have nudged up our FY12/13F DPU by c.3.0% and TP by 2.0% to S$1.61 as we lowered discount rate (risk free pegged to 1.8%) while also taking into account higher renewal assumptions for its offices at Suntec City. FY12/13F yields remain attractive at c.6.0%. Upside risks to earnings estimates hinge on the topping up of distributions from the sale proceeds of CHIJMES which we have not factored in at this moment.