Suntec – MS
Rebound In Occupancy
Quick Comment – 9M09A Ahead of Our Expectations at the Net Income and Distributable Level, with Net Income and Distributable 81% and 82% of our full-year estimates even though Gross revenue and Net property income was in-line with expectations. Variance due to lower than expected finance charges and higher than expected revenue from ORQ. We maintain our Overweight rating and price target of S$1.30.
Operating Conditions Improving At The Margin. Occupancy for both office and retail portfolio appear to have troughed in 2Q09, with both rebounding to 99.1% and 96.4% respectively (Exhibit 6). We estimate that every 10% decline in occupancy results in 17% decline in Net property income, and a rebound in occupancy is comforting. As expected, retail and office rents continue to soften in 3Q09. However, the rate of decline has improved, with office rents -11% in 3Q09 compared to -17% in 2Q09 and retail rents at Suntec City Mall -0.2% in 3Q09 compared to -0.6% in 2Q09. We continue to expect a softening of office rents in the next 3 years given the large upcoming supply, but maintain our view that retail rents will trough in 2009. With retail contributing ~55% of Suntec’s NPI, Suntec should benefit from this rebound in retail rents.
Unchallenging Valuations: Suntec is trading at an average dividend yield of 6.16% (FY10e and FY11e), a 354bp spread over the current 10yr SGS yield of 2.62%. Furthermore, current implied capital values of S$1,937 for retail and S$958 for office (based on S$1.18/share) look undemanding given 3Q09 prime Grade A office capital value S$1,700 psf and our expectation of S$1,500 psf capital value as we believe capital values will hold up better than rents in this office downcycle. We maintain our view that investors should look past the potential capital raising overhang as (1) capital raising is not necessarily negative for stock price performance based on other S-Reits performance (2) based on our estimates, gearing in FY11 is still manageable at 39.7% and with debt pushed back to FY11, there are no near term refinancing risks.