Suntec – CIMB

Looking forward to Phase 3

SUN’s 2Q14 results were in line with expectations, with 2Q DPU accounting for 25% and 1H14 forming 50% of our full-year forecasts. Though no details were revealed for Phase 3 of the AEI, which is scheduled to be completed in 4Q14, we remain confident of the company’s outlook. As the stock is trading at 5.6% FY15 yield vs. the average of 5.9% for its peers, we believe that SUN is fairly valued. As such, we downgrade it to Hold from Add with a slightly higher DDM-based (discount rate: 8.0%) target price. Our FY14-16 estimates rise by 1.5-2.0% as we fine-tune our occupancy and passing rent assumptions.

Results in line

2Q14 results were in line with our estimates, with revenue and distributable income accounting for 24% and 25% of our full-year estimates respectively. During this quarter, approximately 0.2Scts was distributed – an action within expectations as Phase 2 of Suntec City AEI contributed to the earnings for less than one month while Phase 3 was closed for renovation. As a result, 2Q14 DPU was largely flat (+0.8%) yoy.

No details for Phase 3 AEI

The portfolio remained stable with the occupancy rate for the Suntec office at 99.4% while the combined occupancy of Phase 1 and 2 of Suntec City AEI was reported at 97.6%, indicating that Phase 2 occupancy remained unchanged qoq. Although no further details were revealed on the occupancy of Phase 3, citing leasing activities as being still underway, the management guided that a clearer picture will be available in 3Q14. The passing rent for Phase 1 and 2 remained strong, at S$12.57 psf/month.

Downgrade to Hold

Assuming an overall occupancy rate of 95% and a passing rent of S$13.00 psf/mth, we have raised our earnings estimates for FY14-16 by 1.5-2.0%. Based on past history, we remain confident that the management will deliver Phase 3 with good commitment rates and higher rental rates than Phase 2 (c.S$12.15 psf/mth). However, with SUN currently offering an FY15 yield of 5.6%, compared to 6.0% and 5.8% for the office and retail REITs respectively, we are of the view that SUN is fairly valued. Hence, we downgrade the stock to Hold.