• Stay BUY with TP unchanged at SGD1.95, 23% upside and c.6% yield. Suntec REIT reported a strong set of DPU for 2Q/1H which was slightly ahead of our expectations. There were a lot of positive takeaways from results, with all three segments ie office, retail, and convention showing strong comeback post reopening. Concerns over the impact of financing cost from rising interest rates are slightly overblown in our view and we expect organic growth to outpace inflation. Valuation is undemanding at 0.7x P/BV.

• 1H underlying DPU rose 6% YoY on the back of higher contributions from Suntec City mall and office as well as its UK acquisitions. Including capital top-up (past divestment gains) of SGD11.5m, DPU rose 16% YoY, accounting for c.53% of our full year estimates. Overall financing costs went up by 16bps in 1H and is expected to rise another 50bps by end 2022. The REIT has also slightly increased its hedge ratio to 56% (from 53%) with every 50bps expected to result in a 4.7% impact to DPU. Portfolio value remained stable (1H) as valuation gains from its Singapore portfolio (+1.4%) were offset by FX impact due to weaker AUD and GBP.

• Office momentum to continue with stronger rent reversion (2Q) of +5.7% (1Q: +5.3%, FY21: +3.2%), its sixteenth consecutive quarter of positive reversions. Management guided full year reversions to be in mid-single digits with limited vacancies at its assets. Suntec City office occupancy increased 0.6ppt QoQ to 99.4% rising to pre-COVID-19 levels. Approximately 316k sqft of lease were signed in 1H (FY21: 720k sqft) with 31% of them being new leases with demand driven by technology, media and telecommunications, and financial services sectors. Australian portfolio occupancy rose to 95% (+0.7ppt QoQ) with all assets registering improvements.

• Suntec City mall tenant sales 15% above pre-COVID-19 levels for May and June, mirroring strong retail sales growth seen post reopening in Singapore. Rent reversions at Suntec City mall and retail portfolio turned positive in 2Q (for the first time in the past two years) at +3.2%/2.7% respectively, and are expected to be positive for full year at 0-5%. Suntec City Mall occupancy registered a slight improvement to 96.1% (1Q: -96%). Asset enhancements are planned for east wing (capex SGD2m) which will result in 13% NLA increase and a 15% ROI to be completed by end 2022.

• Convention segment NPI turns positive with NPI (2Q) of SGD2.9m slightly earlier than our expectations with positive guidance for 2H, supported by strong domestic demand for consumer and corporate events.

• No changes to our earnings forecasts. Suntec’ s ESG score of 3.1 out of 4.0 is a notch above country median score. Thus we apply a 2% premium to our DDM-derived fair value.

Source: RHB Research - 28 Jul 2022