Suntec REIT

OCBC on 20 Jul 2012

Suntec REIT announced 2QFY12 DPU of 2.361 S cents, down 6.8% YoY and 3.8% QoQ. However, we feel that management has executed well, as this was achieved despite the loss of income from the divestment of Chijmes and commencement of asset enhancement works (AEI) at Suntec City on 1 Jun. Office segment, we note, was the star performer for the quarter, with gross revenue 5.5% higher YoY due to positive rental reversions. Suntec REIT also announced that the Suntec City AEI is now projected to complete by end 2014, earlier than its last guidance for completion in 2015. We now incorporate the stronger performance at Suntec REIT’s office portfolio and the revised completion schedule of Suntec City AEI into our model. Maintain HOLD with a revised fair value of S$1.41 (prev: S$1.23) on Suntec REIT.

2QFY12 DPU declined marginally QoQ
Suntec REIT announced 2QFY12 DPU of 2.361 S cents, down 6.8% YoY and 3.8% QoQ. However, we feel that management has executed well, as this was achieved despite the loss of income from the divestment of Chijmes and commencement of asset enhancement works (AEI) at Suntec City on 1 Jun. Together with 1Q distribution, DPU for 1HFY12 amounted to 4.814 S cents, representing 51.8% of both our and consensus FY12 DPU forecasts.

Good performance at office portfolio
Office segment was the star performer for the quarter, with gross revenue 5.5% higher YoY due to positive rental reversions. Notably, Suntec City office achieved 100% committed occupancy, the first since Mar 2008. However, gross retail revenue was down by 16.1% YoY. On a positive note, occupancy of Suntec City Mall for area not affected by the AEI remained stable at 98.1%.

Escalating enhancement works at Suntec City
Suntec REIT announced that the Suntec City AEI is now projected to complete by end 2014, earlier than its last guidance for completion in 2015. Works on Phase 1 which encompasses Suntec Singapore and Galleria was said to progress smoothly and is on schedule for completion by 2QFY13. We understand that ~193,000 sq ft NLA will be closed progressively and that a 58.5% pre-commitment for the Phase 1 leases has been achieved to-date. Management also reiterated that it will consider utilizing part of the proceeds from the sale of Chijmes to mitigate the temporary dip in DPU, if necessary.

Maintain HOLD with higher fair value
We now incorporate the stronger performance at Suntec REIT’s office portfolio and the revised completion schedule of Suntec City AEI into our model. We also fine-tune our GST refund assumptions for income support, which is expected to be end by 2012. This raises our fair value to S$1.41 from S$1.23 previously. While we are now fully convinced of management’s strong execution, we believe that all the positives have been factored in. Maintain HOLD on valuation grounds.