Suntec – DBSV

AEI growth priced in

• Results in line
  
• Focusing on delivering AEI, strong precommitment.
  
• Positives from AEI priced in, downgrade to HOLD at an unchanged TP of S$1.70
  

Suntec 4Q results are in line. NPI on a year-on-year and qo-q basis recorded a decline of 41.3% and 20.5%, respectively, which is in line with expectations. The was largely led by the lower contribution from Suntec Mall as the reit executed its AEI plans, as well as the income vacuum from the divestment of CHIMJES, which was partly mitigated by the strong office occupancy (99.7%) and positive rental reversions at Suntec offices (rents secured at $8.98 psf). Accounting for the higher contribution from MBFC phase 1, DPU came in at 2.326cts, representing a slight 6.2% drop. Full-year DPU of 9.49 cts is in line with our forecast. NAV rose by 5% to S$2.044 on the back of a revaluation gain of c.S$117m.

Executing Suntec retail AEI. Looking forward, AEI at its Suntec retail mall is likely to be its main focus on the back of a subdued acquisition outlook. Execution of Phase 1 AEI at Suntec City Mall is on track for completion in 1Q. Precommitments came in strong at 83% and 37% for Phase 1 and 2, respectively. While Phase 2 AEI spanning over 380,000 sf will commence by end-Feb, we expect the rental vacuum to be partly mitigated by (i) the incremental income from the completion of P1 AEI work; (ii) the additional 125,000 sf of space created at L1/2 of the conventional centre; (iii) positive rental reversions at Suntec offices.

Downgrade to HOLD on valuations. While we like the reit for its proactive leasing strategies, we believe the positives of the Suntec Mall AEI work have already been priced in. Given the lack of positive catalysts in the near term, we downgrade our rating for Suntec Reit to HOLD, but maintain the target price at S$1.70. Upside risks to our call will hinge on better-than-expected execution of its enhancement initiatives and the topping up of distribution from the sale proceeds of CHIJMES, which we have not yet factored in.