Suntec – DMG

The cloud is clearing

3Q12 results within expectations. Suntec (SUN) reported its 3Q12 results, posting gross revenue and distributable income of S$62.6m (-7.8% YoY) and S$52.8m (-6.3% YoY) respectively. DPU for the period came in at 2.35S¢; together with 1H12 DPU of 4.81S¢, total DPU delivered thus far accounted for 77.0% of our FY12 DPU forecast. During 3Q12, NPI dropped by 19.5% YoY bringing it to S$38.4m; this is mainly attributable to the loss in income from the divestment of CHIJMES and the commencement of the AEI work at Suntec City since June 2012. Going forward, given a clearer outlook on the effect of Suntec City’s AEI on the trust’s income coupled with a higher than expected pre-commitment rate of 71.2% of the upcoming space at Suntec City, we are positive on the future of SUN and upgraded our rating to BUY with a revised TP of S$1.80. SUN is currently trading at 4.8% spread to 10-year bond yield which is 246bps above its pre-crisis mean spread of 2.4%, our DDM based (COE: 8.0%; TGR: 1.0%) TP of S$1.80 translates to a spread of 4.2%.

Drop in NPI and DPU in 3Q12 due to loss in income and AEI. During 3Q12, both the DPU and NPI fall by 7.2% and 19.5% respectively, mainly attributed to the lost in income due to the divestment of CHIJMES and the commencement of the AEI at Suntec City since June. Going forward, management indicated the proceeds from the divestment of CHIJMES could be deployed to partially fund the AEI at Suntec Singapore and Suntec City Mall; though this is unlikely to happen in FY12.

Value enhancements at Suntec City’s AEI. To date, management indicated that 71.2% of Suntec City’s phase 1 AEI space has been pre-committed. With a forecasted average rental rate of S$12.59 psf/mth (+25%) and a higher NPI of S$7.8m/mth (+33%) post AEI, we expect SUN to benefit greatly from this project when it is completed in 2Q13.

Upgraded to BUY with higher TP of S$1.80. Although the earnings of SUN is likely to remain flattish in the coming two quarters, given a high portfolio occupancy rate (office -100%, retail – 98.2%), together with a clearer outlook of the trust and a strong commitment rate to the new space, we believe SUN will benefit greatly upon the completion of its AEI of Suntec City. With a forecasted FY12/FY13 dividend yield of 5.9% and 6.3% respectively, we are positive on SUN and has upgraded our rating to BUY with a revised TP of S$1.80.