Suntec REIT - Buy by DMG (30 July 09)

DMG also issued a buy call on Suntec REIT stating the following reasons:

2Q09 results above expectations. Suntec reported a 6.6% YoY increase (+2% QoQ) in 2Q09 DPU to 2.98¢. Annualised DPU came in at 11.9¢, 20% above our and consensus estimates. Revenue was up 8.9% YoY underpinned by higher rents achieved for Suntec City and Park Mall properties. Suntec will trade ex-2Q09 distribution on 3 Aug 2009. Price target raised to S$1.24 (S$0.80 previously) to reflect a lower of cost-of-equity assumption of 9.6% and a higher terminal growth rate of 3% (nil previously).

Less than 5% of total office NLA left for renewal for FY09. For 1H09, Suntec renewed and signed 375,000 sqft of office space. With this, the remaining office leases expiring in FY09 amounts to approximately 84,000 sq ft or 4.5% of the total office NLA. Office occupancy fell to 94.8% from 97.4% following the return of spaces by UBS and IDA.

Still under-rented but positive rental reversion unlikely to transpire. Passing rents for Suntec City office average about S$6/sqft, marginally below spot transactions of between S$6-7/sqft. Management acknowledged that it is clearly still a tenants’ market and the focus on tenant retention remains paramount. In our view, management will likely shift their focus to occupancy optimisation at the expense of rental rates, capping the likelihood of positive rental reversion in the coming quarters.

Retail reprieve on overall earnings. With retail contributing to 53% of overall income, we expect earnings prospects to remain favourable compared to CCT. We believe the spectre of higher retail footfall at Suntec City is likely to transpire when the Circle Line becomes fully operational in 2010. The opening of Esplanade and Promenade stations will materially enhance Suntec’s traffic footfall, a case that is currently seen in ION Orchard mall, given its connectivity with Orchard MRT.

The stock is still undervalued as current share levels appear to still price-in recapitalisation expectations, a case that is unlikely to transpire, in our view. At current prices, Suntec offers investors an attractive dividend yield of 8.2% for FY10. Stock still undervalued at current levels. Trade stock to S$1.24 (~7.1% yield).