• Keep BUY, new SGD1.70 TP from SGD1.95, 23% upside and 6% yield. 3Q updates shows positive operational momentum accelerating across the Singapore office, retail, and convention portfolios, and the outlook remains positive. The steeper-than-expected interest rate rise is starting to weigh-in in terms of increasing finance costs and falling interest cover. Management is looking at divestments more closely to mitigate some of this impact. Overall asset values should remain stable, as positives from Suntec REIT’s Singapore portfolio mitigates weakness in overseas markets.

• 3Q DPU declined 6.6% YoY, mainly driven by higher financing costs and management fees in units (50% vs 20% last year) – this more than offset NPI increases (+4%). DPU for the current quarter includes a capital top-up of 20 SGD cents. Management intends to maintain its capital top-up of SGD5.8m/quarter for 4Q and will re-evaluate its plans vis-à-vis FY23. SUN will have SGD23m in capital distributions left post 4Q distributions. NPI margin slightly weakened to 72% (3Q21: 74%), mainly due to one-off factors at its overseas assets. The impact of rising manpower costs and utility charges moving forward will be mitigated by planned increases in service charges, in our view.

• Strong operational improvement across its Singapore portfolio. Singapore office occupancy rose 1.6ppts to 99.4% with improvements seen across all of SUN’s assets. Key asset Suntec City’s offices are now at near- full occupancy (99.6%), marking a strong turnaround. Rent reversion (3Q) strengthened 5.9% (1H +5.5%) and is expected to remain positive as expiring rents (FY23) are c.10% below market levels. Suntec City’s mall occupancy rose 0.6ppts QoQ to 96.7% with rent reversions of +4.8% (2Q: +2.7%). This was backed by healthy tenant sales that, YTD, are c.20% above pre-COVID-19 levels. The convention segment performed strongly too, with NPI turning around on the back of increased events. Performances across SUN’s overseas assets in the UK and Australia remain relatively stable, benefitting from their high quality due to the flight-to-quality trend.

• Watching gearing and finance costs closely. Street’s key concerns: High gearing of 43.1% and low interest cover of 2.5x. We do not see any threat of SUN breaching its 45% gearing, considering the strong Singapore portfolio performance. Management is evaluating divestment opportunities closely and does not see a need for dilutive equity fund-raising. Its debt hedge increased slightly to 58% (2Q: 56%), though this remains among the lowest amongst other S-REITs. Every 50bps rate has a 5% DPU impact.

• We revise lower our FY23-24F DPU by 5-6%, mainly factoring in higher interest costs. We also raised our COE assumption by 60bps, resulting in a lower TP. The ESG score to 3.1 out of 4.0 is a notch above the country median. Hence, we apply a 2% premium DDM-derived fair value.

Source: RHB Research - 26 Oct 2022