FY21 in line: Prefer CICT
SUN’s 2H21 DPU rose 9.8% YoY/8.6% HoH, helped by contributions from its new UK properties and higher income from Suntec City mall. While occupancies were stronger for its Singapore office properties, rental reversions are set to moderate. SUN’s overseas diversification has helped improved its DPU visibility, but gearing remains high versus peers and history, and is likely to cap accretion from further deals. The results were in line with our estimates and the street; we fine-tuned assumptions, and rolled forward valuation to FY22E, to our new DDM-based TP of SGD1.45 (COE: 7.8%, LTG: 1.5%). Stay at HOLD. We prefer CICT (CICT SP, SGD2.00, BUY, TP SGD2.55) given catalysts from DPU recovery in 2021, and redevelopment upside.
Retail rental outlook weak
Performance at Suntec City mall improved further in 4Q21, with revenue +9.6% YoY/+16.0% QoQ (vs +12.8% YoY/+2.1% QoQ in 3Q21) and NPI +3.9% YoY/+21.9% QoQ (vs 75.8% YoY/10.3% QoQ), driven by higher occupancy, which had risen from 90.1% in 4Q20 and were stable at 94.7% (vs 95.0% in 3Q21). Rental reversion was softer at -11.8% (from -11.2% in 3Q21 and – 7.2% in 2Q21), better than earlier -15% guidance, but expected to remain weak at -10% in FY22E. Recovery in tenant sales (with Dec 2021 above Dec 2019) was ahead of footfall at c.60%, which we expect to see a lift from returning physical office occupancies in FY22.
Singapore office reversion set to ease
Its Singapore office occupancy increased QoQ to 97.5% (from 96.1%), with stronger performance across its three properties, as occupancies rose at Suntec (from 95.5% to 97.2%), ORQ (97.2% to 98.5%) and MBFC Towers 1&2 (96.8% to 97.3%). Rental reversion was slower at +3.2% for FY21 (vs +7.3% in 3Q21), and should ease further in FY22E, due to higher expiring rents (at SGD9.31 psfpm vs SGD9.25 psfpm passing rents). Occupancy in Australia improved to 94.2% (from 92.8%), while NPIs are cushioned by rent
guarantees at 21 Harris and 477 Collins.
High gearing caps accretion from deals
Gearing was lower at 43.7% (from 44.3% as at end-Sep 2021), while AUM rose c.6% YoY to SGD12.2b following the addition of London’s Minister Building and due to tighter cap rates in Australia (by 12- 3bps). Its diversification into more resilient longer WALE Grade A assets in the UK has strengthened AUM, but further upside from accretive acquisitions will likely need to be timed with divestments, or equity market performance. As mentioned, gearing is high compared to peers and history, which is likely to limit accretion from further deals.