Fair Value : SG$1.70 | Recom : Market Perform (Maintained)

Below expectations. Suntec REIT’s 3Q12 core net profit missed our and market expectations on an annualised basis. A 2.35 cents DPU was declared. 9M DPU amounted to 7.164 cents, down 3.8% from 7.45 cents in the previous year. Suntec REIT’s revenue saw the impact of the disruptions arising from the commencement of AEI works on Suntec City Mall on 1st June. However, the impact was partially offset by the better income from the office segment. NPI margin weakened to 61.4% from 64.0% in the previous quarter, due the consolidation of Suntec Singapore since 3Q2011 as well as higher operating expenses for the existing properties. The REIT has also completed all its refinancing exercise for 2012 after securing a 5- year unsecured facility to refinance the SG$200m term loan due in Oct. About SG$670m of debt will be due next year.

Healthy portfolio occupancy and office rental growth. Suntec’s overall occupancy rate for the office and retail remained steady at 99.9% and 98.6%. Going forward, the REIT is left with a balance of only 1.6% and 19.7% of its Suntec City office leases due to expire in this and next year year. Rental renewal rate improved to SG$8.96 psf from SG$8.71 psf in last quarter. Meanwhile, rental renewal rate for new leases at Suntec City Mall was largely flattish.

Suntec City AEI Ph. 1 is on track. The AEI works for Ph. 1 covering 193k sqf are on track to be completed by 2Q13. A 71.2% of Suntec City Mall Ph. 1 NLA is pre-committed, improved from 58.5% achieved in the 2Q. The projected rental enhancement for the new leases thus far ensures that the ROI of 10.1% will be achieved. More new retail and F&B brands are brought in, such as Sephora, EpiCentre, French Bakery etc.

Risks and concerns – Downside to economic growth dampening business activities.

Forecasts. In view of the weaker 9M earnings, we revise our FY12-13 forecasts down by 3-7%.

Valuation. We adjust our cost of equity assumption to 8% due to the regional trend of yield compression (Singpaore benchmark 10-year government bond yield has fallen to 1.33% from about 1.6% in 1Q). As such, we raise our fair value to SG$1.70 (from SG$1.53). Maintain Market Perform.

Source: RHB Research - 29 Oct 2012