2Q23 Results Analysis: Headwinds remain
- 2Q23 DPU -27% y-o-y to 1.739 Scts, impacted by higher interest cost, and weaker AUD and GBP, in line with our estimates. 2Q23 Core DPU (excluding capital distribution) -30% y-o-y to 1.54 Scts (flat q-o-q).
- Key positives: i) Strong double digit positive reversions recorded at Suntec City (office and mall) and Australia, ii) 2Q23 Suntec City Mall tenant sales relatively flat y-o-y with Singapore fully reopened from May22
- Key data to watch: i) risk of higher refinance cost remains in FY24; ii) ICR ratio inched down slightly q-o-q to 2.1x but gearing remained stable at 42.6%
- Maintain HOLD; TP of S$1.48.
What Happened?
Strong operational numbers but impacted by higher interest costs and weaker forex. Suntec’s 2Q23 DPU -28% y-o-y (flat q-o-q) to 1.74Scts, in line with our estimates. Portfolio showed improvements operationally but was impacted by higher interest costs with average interest costs increased to 3.64% (stable q-o-q) vs 2.51% in 2Q22. While gearing is held stable at 42.6%, ICR ratio decline slightly q-o-q to 2.1x vs 2.2x in 1Q23. Portfolio occupancy held stable at 98.4%. Office portfolio continue to deliver strong double digit positive reversions both in Singapore (+10.5% in 2Q23) and Australia (19% in 1H23). Similarly, Suntec City Office and Suntec City Mall delivered strong positive reversions at 10.8% and 18.2% in 2Q23 respectively. 2Q23 tenant sales at Suntec City Mall is estimated to be c.8% above pre-COVID levels, and relatively flat y-o-y as Singapore fully reopened from May22 onwards. Suntec Convention saw strong recovery in revenue following more MICE events but NPI recovery was muted due to higher expenses. Australia portfolio occupancy fell marginally by 0.7ppt q-o-q to 96.6% mainly from Southgate (-1.5ppt to 88.6%) and 21 Harris (-2.3ppt to 95.3%).
Our View
Risk of higher interest costs in FY24 remains from refinancing should interest rates remain high for longer; Maintain HOLD; TP of S$1.48. Despite strong operational recovery, Suntec’s earnings continue to be impacted by higher interest rates, expenses and weaker forex. On q-o-q, average cost of debt appears to have stabilised. Given minimal debt expiry left to be refinanced in 2023 (S$100m; c.2% of total debt), we do not expect major spike up of interest costs in 2H23, however, refinancing of FY24 debt remains a concern should interest rates remain high for longer. In addition, capital distributions will taper off in FY24. We continue to keep watch on the re-rating catalysts, which include i) Fed cutting interest rates, ii) stronger recovery in Australia and UK office markets and iii) Chinese tourists returning to drive higher organic performnace.
More details after the briefing.
| Summary of results | 2Q2023 | 1Q2023 | %q-o-q | 2Q2022 | % y-o-y | 1H2023 | 1H2022 | % y-o-y |
| Revenue | 115.6 | 108.7 | 6.3% | 104.3 | 10.8% | 224.3 | 203.5 | 10% |
| NPI | 77.0 | 76.3 | 0.9% | 78.6 | -2.0% | 153.3 | 152.9 | 0% |
| Income contribution from JV | 23.4 | 22.8 | 2.6% | 30.4 | -23.0% | 46.2 | 61.3 | -25% |
| DI | 50.2 | 50.3 | -0.2% | 69.4 | -27.7% | 100.5 | 138.1 | -27% |
| DPU | 1.74 | 1.74 | 0.1% | 2.419 | -28.1% | 3.48 | 4.81 | -28% |
| Gearing | 42.6% | 42.8% | -0.2 ppt | 43.1% | -0.5 ppt | 42.6% | 43.7% | -1.1 ppt |
| Average cost of debt | 3.64% | 3.68% | 0 ppt | 2.51% | 1.1 ppt | 3.64% | 2.35% | 1.3 ppt |
| DSCR | 2.1 | 2.2 | (0.1) | 2.7 | (2.8) | 2.1 | 2.6 | (0.5) |
| Hedging ratio | 58% | 72% | -14 ppt | 56% | 2 ppt | 58% | 56% | 2 ppt |
| Key Operational Data | 2Q2023 | 1Q2023 | %q-o-q | 2Q2022 | % y-o-y |
| Portfolio occupancies (est) | 98.4% | 98.4% | 0 ppt | 96.7% | 1.7 ppt |
| – SG Office | 99.3% | 98.9% | 0.4 ppt | 97.8% | 1.5 ppt |
| – SG Retail | 98.2% | 98.3% | -0.1 ppt | 95.7% | 2.5 ppt |
| – AU Office | 96.6% | 97.3% | -0.7 ppt | 95.0% | 1.6 ppt |
| – UK Office | 100.0% | 100.0% | 0 ppt | 98.3% | 1.7 ppt |
| WALE (years) | |||||
| – SG Office | 2.7 | 2.6 | 0.1 | 2.60 | -2.5 |
| – SG Retail | 2.2 | 2.2 | 0.0 | 2.30 | -2.3 |
| – AU | 4.8 | 5.2 | -0.4 | 5.20 | -5.6 |
| – UK | 9.3 | 9.4 | -0.1 | 10.1 | -10.2 |
| Rental reversions | |||||
| – Suntec City Office | 10.8% | 10.5% | 0.3 ppt | 3.9% | 6.9 ppt |
| – Suntec City Mall | 18.3% | 16.5% | 1.8 ppt | 3.2% | 15.1 ppt |