Suntec – DBS
Results in line
Suntec’s results were in line with expectations, with the reit still enjoying organic growth from positive rental reversions. Although we expect the group to continue to benefit from positive average rental revenue growth, the pace is moderated by the softer economic environment. While Suntec’s mixed portfolio of office and retail space offers investors relatively more resilience, there is unlikely to be near term catalyst to drive share price. Maintain Hold with DCF-backed TP of $0.79.
Low base effect. Suntec reported Oct –Dec 08 distribution income of $44.2m (DPU: 2.86cts), +32% yoy on a 16% higher revenue of $63.5m, thanks to organic growth across its portfolio. Retail revenue accounted for 55% of topline and benefited from higher renewal and replacement rents. Office income continued to enjoy positive rental reversions with quarterly transacted rents at Suntec Office averaging $11.20psf. Occupancy dipped slightly to 98.2% due to frictional issues. The group had changed its FY end to Dec and FY08 revenue and distribution income of $294m and $201m are based on 15-mth performance. Portfolio was revalued down by 7% over Sep 07 l evels, lowering bk NAV to $2.01 and lifting gearing to 34.3%.
Uncertain macro outlook. Weaker economic outlook going forward is likely to dampen demand for office space and moderate retail sales. Our current projections are for office rnts to dip 35% over this cycle with vacancies rising to 15% correspondingly. The group has 28% of its office portfolio and 39% of its retail NLA due for renewal in 09. While the group should enjoy positive rental reversions, owing to a low base, possible vacancy risks exist as demand for office space contracts. While occupancy level of its retail space is full, retail rents are likely to remain stable. Negotiations for refinancing its $700m CMBS due Dec 09 are already underway.
Lack of near term drivers. Suntec is offering FY09 and FY10 DPU yield of 13.6-15% and 0.3x P/bk NAV, in line with other office and retail S-reits. While valuation is compelling, given the lack of near term drivers, we maintain our Hold call with a target price of $0.79.