Suntec – CIMB

Post-results luncheon feedback

We recently hosted a post 3Q13 results investor luncheon for SUN. Key issues discussed were 1) progress of the Suntec City AEI , 2) the long-term competitiveness of the mall, 3) office outlook and 4) acquisitions. We came away with our positive view on the stock intact.

We maintain our Outperform rating with an unchanged target price of S$1.91. Targeted returns from the Suntec City AEI continues to show incremental progress and we expect successful execution to underpin a DPU CAGR of 6.5% in FY14-16. At a FY15 DPU yield of 6.3% and P/BV of 0.85x (widest discount among peers), we think the market has yet to fully appreciate this potential.

What Happened

We hosted a post-results investor luncheon with SUN. Several main issues discussed include: 1) Suntec City’s Phase 2 AEI and its progress; 2) its plans in the repositioning of the Suntec City Mall; 3) Suntec’s office occupancy and room for the possibility of further positive rental reversions and 4) its plans to conduct further acquisitions amid a compressed cap rate market.

What We Think

The discussion reaffirms our belief that although Phase 2 of the AEI is on track to be completed by 4Q13, Phase 2 areas could potentially command less than its guided S$12.59 psf/month as 40-45% of the total NLA in Phase 2 is taken up by anchor tenants. In Phase 1, the general trade occupancy currently varies between a healthy 16% and 18%. Although Suntec City is still largely a ‘weekday mall’ that is highly dependent on the office crowd, with the completion of Phase 2, anchor tenants such as Golden Village and Toys ‘r’ Us are expected to draw crowds from both the family and young adult segments which could potentially boost weekend traffic.

Suntec’s office is currently generating positive rental reversions with 3Q13 at S$8.55 psf/mth (+1.5% qoq). With FY14 expiring leases at below S$8.55 psf/mth, management indicated its confidence in recording a positive rental reversion. Given the challenging acquisition environment in Singapore, we expect SUN to consider seeking acquisitions overseas. Timely of this prospect is still unclear and is unlikely to drive SUN’s share price in the near-mid term, in our view.

What You Should Do

SUN remains our top pick within the SREIT space. Maintain Outperform.