Suntec – DMG

Value not fully appreciated; BUY

1Q10 earnings in-line. Suntec REIT reported 1Q10 results DPU of 2.51¢ (-13.9% YoY; -12.9% QoQ), representing 25% of our FY10 DPU forecast of 10.1¢. 1Q10 annualised DPU was inline with ours but 12% above street’s forecast. Net property income fell 2.7% YoY on the back of negative rental reversion. We adjust our FY10 DPU forecast to 9.6¢ as we assume slightly higher negative rental reversions for the next few quarters. Suntec will trade ex-1Q10 distribution on 3 May. Maintain BUY, DDM-based TP of S$1.56.

Suntec retail occupancy slipped marginally. Suntec REIT’s portfolio office occupancy remained stable at 96.9%. Both Park Mall and One Raffles Quay remain 100% occupied while Suntec City office registered a 0.2ppt QoQ improvement in occupancy to 95.5%. In contrast, Suntec’s retail occupancy saw a slight occupancy decline of 0.9ppt to 97.2%, due largely to the 1.2ppt decrease in Suntec City mall’s occupancy, which now stands at 96.4%. Management indicated that this is due to temporary frictional vacancy.

Office rents will bottom by end-2010 and may stay flat till 2012. Whilst there is every sign that office rents have stabilised, it may be premature to make a call on an early return to rental growth. We expect prime office rents to fall to the S$6/sqft level by end-2010 and remain at that level till 2012. We believe the huge supply of new completions (at only 38% pre-commitment level) as well as the substantial amount of secondary supply from tenants relocating to new mega-schemes may place a brake on rental recovery.

Tenant retention remains key focus in 2010; BUY with TP of S$1.56. The focus on tenant retention remains paramount for Suntec REIT, in view that the bulk of leasing activity currently involves replacement demand, i.e. tenants moving from older office blocks to newer ones. We believe Suntec REIT will likely register negative rental reversion in 2010 in view that expiring leases are higher than current spot rates. Nevertheless, we believe the Singapore office sector is at the point of ‘L’ inflection and long-term rental growth prospects are likely to be robust once excess capacity is absorbed. At our TP, stock still offers an attractive yield of 6.9%, above its heyday yields of 4.6%.