Suntec – CIMB

One step back, two steps forward

Although earnings continued to be weak in 3Q13, we remain confident of the smooth execution of Phase 2 of the AEI which is slated for completion by 4Q13. A drop in earnings is expected to be mitigated by a full quarter’s contribution from Phase 1 in the near term.

3Q13 results were largely in line with our and consensus estimates. 3Q DPU accounted for 25% of our FY13 forecast while 9M13 DPU met 75% of our forecast. We roll forward our DDM-based target price (discount rate of 7.9%), raising it by 14%. We reiterate our Outperform rating in view of the stellar execution of the AEI at Suntec City as we anticipate respectable growth through it.

AEI continues to affect earnings

Suntec REIT’s 3Q13 DPU dropped by 2.6% yoy, mainly because of Phase 2 of the asset enhancement initiative (AEI) at Suntec City. This includes a DPU top-up of 0.199 S¢ (S$4.5m total) from the Chijmes proceeds. During 3Q, Suntec Singapore began contributing to earnings. The bulk of earnings from Phase 1 AEI is expected to come through only in 4Q13. However, by then, c.249,000 sq ft of retail space will be closed in preparation for Phase 3 of the AEI which is scheduled to start in 1Q14.

Phase 2 AEI on track

Phase 2 AEI remains on track for completion by 4Q13. Pre-commitment stands at an impressive 83.7% though achieved rents for this phase are expected to be a tad lower than in Phase 1 as a result of fewer fashion anchors. We continue to anticipate double-digit growth from Phase 2 as Suntec REIT targets to achieve 10.1% ROI, which translates into S$12.59 psf/mth.

Maintain Outperform

We continue to favour the REIT for its stable portfolio occupancy (99.8% for office, 98.3% for retail) and strong rental reversion post AEI. In addition, with leases secured during the quarter at S$8.55 psf vs. S$8.42 psf in 2Q13, we are confident that Suntec REIT will be able to achieve positive rental reversion when 17.6% of its office NLA comes up for renewal in FY14.