Suntec – DBSV

A winner in the making

• Slightly ahead of expectations, 3MDPU representing 28% of our forecast

• First phase of Suntec City AEI to start, expect earnings to normalise

• Maintain BUY at an unchanged TP of S$1.45

Highlights

Slightly ahead of expectations. 1Q12 gross revenue and NPI rose by 20.1% and 5.0% y-o-y to S$73m and S$49m respectively, largely due to the consolidation of revenue from Suntec Singapore. Additional contribution from Marina Bay Financial Centre (MBFC) Phase 1 also helped to lift distributable income by 3.8% to S$54.9m. DPU was 2.453Scts representing 28% of our FY12 Forecast

Our View

Stable office portfolio. While this quarter marked the end of the income support for ORQ, we expect this income vacuum to be offset by positive rental reversions for its remaining portfolio, and the possible refund of the GST paid on the ORQ income support in the next three quarters. Meanwhile, monthly signing rents at Suntec City Office Towers remained firm at S$8.79 psf supported by high occupancy (99.5%).

First phase of Suntec retail mall’s AEI works starting. Approximately 193,000 sq ft, or 23% of the Suntec City retail space is expected to undergo AEI works from June 2012. While we expect some downtime in occupancy, the management will mitigate this by carrying out the works in phases. 4Q12 is likely to be the most intensive phase of its refurbishment exercises before occupancy starts trending up in 1Q13. On a positive note, NLA will be boosted to 380,000 sf upon the completion of AEI works in mid -2013, of which 45% has been pre-committed to popular tenants like H&M, GAP and La Senza. At the same time, some of the anchor tenants are expected to have new concept stores. This will boost the mall appeal and drive footfall in the medium term.

Recommendation

Maintain BUY. Suntec offers FY12-13F DPU yields of 6.7% and is trading at an undemanding 0.7 x P/BV. Gearing is at a healthy 37.4%. There is also minimum refinancing this year (7% of total debt). Our unchanged DCF-backed TP of S$1.45 offers a total return of close to 20%.