Suntec – MayBank Kim Eng

Patience Is Bitter, But Its Fruit Is Sweet.

3Q13 DPU to fare better. The worst distribution drag by Suntec City Mall’s (SCM) ongoing renovation works is likely over in 1H13, when Phase 1 new tenants have yet to start paying rentals and Phase 2 old tenants are being vacated for the AEI. Nonetheless, we noted that many Phase 1 tenants (H&M, Uniqlo, Giant, Breadtalk Café , Hans etc.) have begun operations in Jun-Sep, but they are likely to be still on rentfree periods (1-2 mths). We thus foresee modest rental uplift last quarter and forecast 3Q13 DPU at 2.28 SG-cts (+1.5% QoQ; -2.8% YoY) and FY13 DPU at 9.23 SG-cts. (-2.7% YoY).

Look out for progress update on AEI. Pre-commitments for Phase 1 leases in 2Q13 hit 99.6% (96.7% in 1Q13), with average passing rent of SGD13.09 psf/mth. Suntec also reported that 70.1% of Phase 2 NLA in 2Q13 has been pre-committed (prev. qtr 53%). We think pre-commitments for Phase 2 should hit at least 85% in 3Q13. Looking at the intensity of the refurbishment works, overall AEI is making good progress and works should wrap up as scheduled by 4Q14.

Retail Sales holding up. The Singapore Retail Sales Index (excluding motor vehicles) went up 2.5% YoY in both Jun and July. The Food and Beverage Services Index was also up 4% and 2.1% YoY in Jun and Jul respectively. The largest dip in Jul came from recreational goods (-3% YoY) and telecommunications apparatus/computers (-7%). Fast food outlets also suffer a slight dent (-0.2% YoY). We expect retail sales to fare better in Aug-Sep period following the success of the F1 race, with a total of 262,527 visitors at the Marina Bay Street Circuit over the three-day sell-out race weekend (highest attendance since the inaugural 2008 race.) We also noted that turnover rents for Retail REITs constitute only about 2-10% of overall FY11-FY12 gross revenue, which should provide some reprieve in the event of a persistent sales slump, as retails rentals are typically contracted for three years.

DPU top-up possible. Suntec received cash proceeds of ~SGD147m from the sale of Chijmes in 1Q12. So far, it has topped-up SGD2.7m in 1Q13 and SGD7.8m in 2Q13. Looking at the conservative SGD10.5m payout this far, we do not rule out another top-up in 3Q13.

Reiterate BUY. Our investment thesis on Suntec remains in-tact. In this growth-limited environment, Suntec is one of the very few S-REITs that has a DPU CAGR growth of 4% from 2012-2015 (12.7% over three years), following the rental reversions from the major overhaul at Suntec City. Suntec is now trading at forward-yield spreads of 3.2% and P/B of 0.80x Maintain BUY with an unchanged TP of SGD1.90.