Suntec shines. Suntec met our 3Q12 DPU forecast of at least 2.15 SG-cts by announcing an upbeat payout of 2.35 SG-cts this quarter. 3Q12 revenue at SGD63m (-12% QoQ, -8% YoY), was 25% of ours and 23% of consensus estimate. The YoY decline was due to AEI at Suntec City and the divestment of CHIJMES, which was partially mitigated by higher office revenue. 9M12 revenue at SGD207m (+9% YoY), was 81% of ours and and 77% of consensus estimate. 3Q12 DPU at 2.35 SG-cts (flat QoQ, -7% YoY) was 26% of ours and 25% of consensus estimates. 9M12 DPU at 7.16 SG-cts (-4% YoY) was 78% of ours and 77% of consensus estimates.

Portfolio review. Suntec City office occupancy remained at full occupancy with leases secured for the quarter at an average rent of SGD8.96 psf/mth (prev. qtr SGD8.71 psf/mth). With less than 23% of office leases NLA expiring per annum for the next three years, we remain positive that Suntec’s proactive leasing management will continue to optimise its office portfolio. Due to phase 1 AEI works, Suntec City Mall occupancy was dragged down to 75%-78% (excluding the space vacated by Carrefour), according to our estimate. This also caused average passing rent to inch down from SGD9.35 to SGD9.27. One Raffles Quay stood at full occupancy, whilst occupancy for the MBFC1 remained at 99.5%.

AEI making good progress. Pre-commitments for Phase 1 leases in 3Q12 hit our expectation of at least 65% (71.2%), and we believe most leases are secured above Suntec’s post-AEI target of SGD12.59 psf/mth. Giant and Cold Storage will be opening temporary shops on level 1 & 2 in Nov 2012 (former site occupied by Carrefour). A new Giant Hyperfresh store will be set up at basement 1 in mid 2013. Food Republic has ceased operations and tenants at Fountain Food Terrace are expected to vacate in the coming months. We think Phase 2 AEI should commence on time by Apr-May 2013 and we forecast that the largest dip in mall occupancy should occur in FY13F at ~59%, but this will improve in FY14F to ~70%.

No DPU top-up in 3Q12. Suntec did not make any DPU top-up in 3Q12 using its Chijmes divestment proceeds. Looking at the income contribution this far, we think Suntec will be able to comfortably pay out a DPU of at least 9.0 SG-cts for the full year. This increases the possibility that Suntec need not make any DPU top-up in FY12 but keep this flexibility for FY13, when its mall occupancy is most affected. There are only a handful of SREITs that offer yields of 6% but are trading at discounts to book. Suntec is one of them, with a yield-spread of 480bps compared to the sector average of 427bps. With all its assets and income contribution from Singapore, we believe investors will continue to favour Suntec in the absence of forex risk (all SGD), highly-liquid S-REIT counters (ADTV >USD8m) and investable alternatives. Reiterate BUY with TP of SGD1.70 (prev. SGD1.66)

Source: Maybank Kim Eng Research - 29 Oct 2012