Value enhancements through AEI at Suntec City. At its last results briefing, SUN's management indicated that 83% and 37% of Suntec City's Phase 1 and Phase 2 AEI space respectively have been pre-committed. With a forecasted average rental rate of SGD12.59 per sq ft per month (+25%) and a higher NPI of SGD7.8m per month (+33%) post-Phase 1 AEI, we expect SUN to benefit from this project when the majority of works are completed in 4Q13.

Bright prospects despite weak performances in 1Q13 and 2Q13. While we speculate Phase 1 pre-commitment rate to have exceeded 90%, we expect the earnings for SUN to be the weakest between 1Q13 and 2Q13, a period when the Phase 1 has not commenced operations while Phase 2 is closed in preparation for the upcoming AEI. However, as we approach the end of Phase 1 AEI, we expect SUN to re-rate as its outlook brightens on the back of a well-executed AEI.

Trading at steeper discount than appeared. SUN, which is currently trading at 0.9x P/B is one of the few S-REITs that are still trading at a discount to book value. In addition, given that Suntec retail mall (which accounts for c.33% of the total portfolio value) is valued at c.SGD2,100-SGD2,200 per sq ft, we believe SUN is trading at a steeper discount than it appears on book; after taking into consideration of the 'true value' of the mall.

SUN trading at higher yield versus peers. Currently, SUN is trading at a dividend yield of 5.2% and 5.7% of FY13's and FY14's forecasted yields respectively. Concurrently, given a lower average dividend yield of 5.0% (4.8% if Keppel REIT is stripped out) among the Grade A office and retail REITs space, we believe SUN is due to re-rate once positive income starts flowing in when Phase 1 AEI is completed in about 1.5months. On this basis, we have upgraded our rating on SUN to a BUY with a TP of SGD2.10 on the back of a clearer outlook, positive rental reversion and high pre-commitment rates for the new space.

Source: OSK