Suntec – DBS

Comment on Results
Suntec reported results slightly below expectations, delivering 1.963 cents for 1Q07 which grew by 14% y-o-y. Revenue grew 16.5% y-o-y, mainly due to full recognition from Park Mall and Chijmes as well as organic growth of office and retail portfolio. Office revenue grew 18.3% while retail revenue grew 15.6%. Stripping out growth through acquisitions, organic growth attributed to 14.5% and 4.7% for the office and retail portfolios respectively. With lower maintenance offset by higher property tax and property expenses, net property income grew by 21.7% y-o-y. Mitigated by rising interest costs, distribution income grew by 21.7% yo-y to S$27m. Note that for 4Q06 distribution, 0.762 cents for the period 1 October to 5 November 06 has already been distributed on 29 November 06.

Outlook
We continue to like Suntec for its exposure to the office sector on the back of bullish fundamentals. Recently, URA reported 4Q06 property market data which reflected office rentals and capital values rising 30.3% and 17% respectively. We expect office rents to continue the upward momentum and Suntec would be a prime beneficiary of spillover demand from tight vacancy in prime CBD. Moving forward, we note that Suntec is likely to enjoy three waves of positive rental reversions for its office portfolio with 92.6% of leases expiring in the next three years. With 21.1% (15.9% YTD to Dec) and 31.9% of office NLA expiring in FY07 and FY08 respectively – currently under-rented at average of low S$4 levels -there would be strong rental kicker in FY07 and FY08 with Suntec office asking rents now at S$8.50-S$9.00.

Recommendation
Despite the lack of visibility on acquisitions without the backing of a sponsor, we continue to like Suntec for: i) Its office exposure which is currently underrented ii) Retail enhancements well under progress and average retail rents continuing to deliver growth iii) Beneficiary of circle line – once completed in 2010 and for both the Suntec office and retail portfolios iv) kicker in traffic flow with Singapore’s position as major MICE hub and Integrated Resorts. We bring forward our assumption that closing rent will reach S$8 in FY07 from FY08 for Suntec’s office portfolio on the back of strong organic growth. Hence we are raising our DCF valuation for Suntec to S$2.20. Maintain Buy. Key risk to our recommendation include deferred payment in the form of units with full effect by 2011 which we have taken into account in our DCF valuation.