Suntec – DBSV

Smart and prudent approach

At a Glance

• 9M DPU makes up 80% of our full year estimates

• Forward locked in office rents to extend earnings visibility

• Re-rating catalyst from impending AEI works at Suntec Mall and possible divestment of CHIJMES

• Maintain BUY at a lower TP of S$1.53

Comment on Results

Better than expectations. Suntec Reit gross revenue rose 7.4% yoy to S$67.9m in 3Q. However, NPI fell by 5.6% to S$47.8m due to higher property taxes and an enlarged portfolio following the acquisition of 51% stake in Suntec Convention Centre. The decline was offset by a higher contribution from the one-third stake in Marina Bay Financial Phase 1, lifting distributable income by 22% to S$56.4m or DPU of 2.533 Scts. 9M DPU makes up 80% of our full year estimates. Our estimates are tweaked higher to account for the better YTD performance, resulting in a 2-3.5% increase in FY11-12F DPU estimates.

Forward locked in office renewals and impending AEI works at Suntec Mall are positive moves. Office occupancy stabilized at 98% as the group renewed c200,000 sf of office space including UBS’s lease (>100,000sf). This brought down the office leases to be renewed in FY11/12 in terms of NLA from 22% a quarter ago to 13%. We view this strategy to forward lock in tenants as a positive move in view of the global macroeconomic uncertainties. However, renewal rents excluding those leases with rental caps were at an average of S$8.4 per month, slightly below the asking rents in the vicinity. Meanwhile, occupancy for the retail portfolio stood at 97.6%, with vacancies largely coming from Suntec City Mall (96.5%). In our view, this could be due to the planned AEI works at Suntec retail mall. If materialize, this would help unlock the mall’s value in the longer term.

Recommendation

Maintain BUY at a lower TP of S$1.53. Gearing is currently at 40%. We think the divestment of Chijmes would be a re-rating catalyst for the reit as the proceeds could be deploy into better yielding opportunities, as well as strengthen its balance sheet. Maintain BUY with a lower DCF-based TP of S$1.53 as we rolled our numbers forward into FY12 and moderate our rental growth outlook.