Suntec – DMG
Office segment continues to shine
Suntec – DBS
Time is ticking
2Q07 results hit by dilution. Higher office rental revenue (+23%) from both Suntec and Park Mall, with higher occupancy and rental rates as well contributions from Suntec Strata acquisitions and muted retail rental revenue (+0.9%) supported the growth in gross revenue and net property income of 8.1% and 10.3% respectively. Distribution income grew 19.3% yo-y, delivering 2Q07 DPU of 1.965 cents which translates to DPU yield of 3.9%. With the recent private placement of 120m new units (net proceeds of S$176.6m) to fund the buyback programme for Suntec strata units, there was a dilutive negative impact from a larger unit base in the absence of yield accretion coming through with only 30,172 sf of Suntec office strata space (S$40.7m) acquired to date. As such DPU growth of 8.5% y-o-y did not keep pace with growth in distribution income, and was below expectations.
No acquisitions, but value of portfolio value grew. Along with its 2Q07 results, Suntec has revalued its portfolio upwards by another S$613.6m, mainly attributed to Suntec City (office +30%, retail +14%) in addition to the Suntec Strata space buyback which raises portfolio to S$3.8bn and reduce debt to assets ratio to 23.3% from 27.7% in 1Q07, further increasing debt headroom for acquisitions. Accordingly, NAV per unit is raised to S$1.80, from S$1.43 in FY06. Moving forward, we continue to see Suntec as a strong beneficiary of asset reflation, backed by strong rental growth. However, we are cautious on prospects of acquisitions for Suntec, as the strata buy back programme is not gaining pace. Office capital values are on the rise, compressing physical yields with immediate yield accretion prospects looking increasingly remote.
Office rents continue to surge by 20%, within expectations. Office rents in Suntec City continue to surge, achieving rents of S$8.00-S$9.50 psf from S$6.50-S$8.00, within expectations. We reiterate that Suntec continues to be a beneficiary of spillover demand from tight vacancy and bullish rentals in the CBD spilling over to secondary locations.
Maintain Buy, TPS$2.20. While time is ticking with dilution from deferred units soon to take effect in FY08, strong positive rental reversions are expected to outpace the negative effects of dilution for Suntec’s distribution income which we have factored into our DCF projections. Despite the lack of visibility on acquisitions without the backing of a developer sponsor, i) asset reflation remains a key theme for Suntec, ii) retail enhancements well under progress iii) beneficiary of circle line – once completed in 2010-2011 for both the Suntec office and retail portfolios iv) kicker in traffic flow with Singapore’s position as major MICE hub and Integrated Resorts. With target price of S$2.20 backed by DCF valuation unchanged, we maintain our Buy recommendation on Suntec.
MapleTree – OCBC
On target for S$1bn acquisition per year
Growth again due to acquisitions. Mapletree Logistics Trust (MLT) reported a good set of 1Q07 results. Revenue was up over 116% YoY and 7% QoQ to S$28.8m, and distributable income improved 84.2% YoY and 23% QoQ to S$15.3m. Distributable income per unit (DPU) was less robust, improving by 33% YoY and 2% QoQ to 1.48 cents. This is slightly better than OIR’s forecast of 1.40 cents. The bulk of the growth came from the acquisition of 25 properties (worth S$785m) over the last 12 months and 8 properties over the last quarter. MLT currently has a portfolio of 49 properties worth about S$1.5bn and will acquire a further 13 properties worth about S$470m in 2H07. This should bring its total asset size to about S$2.0bn. MLT is well positioned to continue its growth strategy and we see an annual acquisition of S$1.0bn per year as not improbable.
Next markets in South Korea and Vietnam. Presently MLT’s country/ territory exposure is in Singapore, Malaysia, China, and Hong Kong. MLT recently announced a mega acquisition of 5 assets worth S$350m in Japan, a project worth S$17.8m in Xian, and 2 projects worth S$13m in Malaysia. We expect it to enter more new markets in 2H07; namely South Korea, Vietnam and India. All these acquisitions are likely to boost its DPU. We have thus revised up our FY07 and FY08 DPUs from 5.6 cents and 5.9 cents to 6.2 cents and 6.5 cents, respectively.
Successfully raised S$349m. The key event over the last quarter was the successful raising of fresh equity. A gross proceed of S$349m was raised with the issue of 296.822m new units at a weighted cost of S$1.176 per unit. The proceeds of the new equity have been used to finance the acquisition of 15 recently bought properties and to refinance other older acquisitions. With the new equity, MLT’s gearing has fallen back to about 40% range. More importantly, it means that MLT can raise a war chest of S$300m if it maximizes its gearing to 60%.
Maintain BUY with higher fair value. MLT has done well since our last report; appreciating from S$1.19 to our fair value of S$1.33. However, at the current pace of acquisition, our target asset size of S$3.0bn is likely to be breached by 2008. We have thus revised up our target size to S$4.0bn. This, together with lesser dilution from the issue of fewer new units, has a positive impact on our fair value estimate. We have thus revised up our fair value from S$1.34 to S$1.50 and maintain our BUY recommendation.
Suntec – OCBC
Valuations are not compelling
Results are in line. Suntec REIT reported 2Q07 revenue of S$46.6m; +8% YoY and +2% QoQ. Distributable income was equally strong at S$28.0m; +19% YoY and +4% QoQ. At the DPU level, growth was more moderate at +9% YoY and +4% QoQ to 1.965 cents. Growth was mainly due to the increase in office revenue at Suntec City and Park Mall offices as well as the newly acquired strata space from Suntec City and good cost control. While property expenses rose 2%, this was much lower than the rate of increase in revenue and this explains the stronger bottom-line performance. Cost to income ratio fell from 26% (2Q06) to 24% in 2Q07. The results are in line with our estimates.
Outlook remains positive. Suntec continues to benefit from the buoyant office/retail market. Over the period, its office portfolio achieved an occupancy rate of 99.2% (Suntec at 99.3% and Park Mall at 98.1%). Going forward, a substantial portion of its space is coming up for renewal and this should boost organic growth over the next 2 years.
Reinstatement of acquisition fees to manager. In Aug 2005, Suntec’s manager ARA Trust Management (ARA) waived its acquisition fees entitlement to show its commitment to the long term interest of unitholders. In Feb 2007, ARA announced that it will be reinstating the 1% fees for new acquisitions. In terms of impact to unitholders, we see this additional cost as marginal and should not have any meaningful effect on the accretion assessment of any new purchases. Since Dec 06, Suntec has bought about 30,172 sf of strata space at Suntec Office Towers at an average cost of $1,349 psf or a total of S$40.7m. We do not see any funding issue, as Suntec’s earlier placement raised about S$177m. We estimate over 1.0 m sf of strata space not owned by Suntec, but it is difficult to assess whether Suntec will be able to acquire the remaining space as ownership is very fragmented.
Maintain HOLD. Suntec is trading close to our fair value of S$1.82 (based on asset size of S$4.5bn versus current asset size of S$3.9bn) and with its trading yield at about 4% and with no acquisition pipeline, the investment case for Suntec is not compelling. We thus maintain our HOLD rating on Suntec.
MapleTree – CIMB
Reaching fair value
• 1Q07 in line. 1Q07 distributable income of S$15m (+84% yoy) represents 20% of our full-year forecast and 23% of consensus’s. MLT’s 1Q is traditionally the weakest and we expect earnings to step up over the next three quarters to meet market and our targets for this year.
• Rental revenue more than doubled to S$29m, underpinned by the acquisition of 25 new properties in the last 12 months. MLT’s current S$1.5bn portfolio is over twice its size a year ago. There are now 13 announced acquisitions worth S$467m pending completion, which should take MLT’s portfolio to S$2bn. As such, we are confident that our S$2.4bn target for end-2007 can be met.
• Sustained high occupancy. Overall occupancy stood at nearly 100% at the end of 1Q07. MLT has secured a new tenant for 1,000 sf of space at TIC Tech Centre (NLA 30,758 sq m, third-largest asset by revenue contribution), taking the property to full occupancy in the coming quarter. A three-storey extension with 6,285 sq m of space will be added to TIC Tech Centre. EBITDA yield for the additional space is projected at 8.1%, when the enhancement work is completed in Oct 07.
• Overseas properties from sponsor. Two overseas properties developed by sponsor Mapletree, Lingang Free Port (S$39m, GFA 46,500 sq m) in China and the Vietnam Singapore Industrial Park (VSIP1, GFA 23,600 sq m), have been completed early this year. Three out of five units at VSIP1 have been leased and we believe this property could be injected into MLT as early as this year. It was also reported recently that MLT could be buying its first assets in South Korea and India very soon. As competition for assets on the home turf intensifies, MLT’s capacity for regional expansion should give it an advantage.
• Maintain Neutral. While our FY07-09 DPU forecasts have been maintained, our DDM target price has been raised from S$1.32 to S$1.43 to reflect stronger projected DPU growth for FY10 (cost of equity 6.5%, implied CY07 yield of 4%). With a projected DPU CAGR of 12% for the next four years, MLT remains one of the fastest-growing REITs in Singapore. Above-average forward yields of 4.3-5.3% should provide ample support for the share price.