• 3Q23 results were within expectations. Gross revenue grew 15% YoY to S$123.4m and NPI increased by 9.7% YoY to S$6m. Over the past three quarters, results have been 79.7%/77.9% of our FY23e forecast, respectively.
• 3Q23 DPU declined by 14% YoY to 1.793 Singapore cents, and when considering 1H DPU, it was 76.3% of the FY23e forecast. Strong operating performance was offset by higher financing cost, FX fluctuation, and higher maintenance fund contribution.
• We maintain BUY with an unchanged DDM-TP of S$ 1.47. No change to our forecasts. We expect Singapore market to be the key revenue driver with double-digit rental reversion for the retail side to continue and high single-digit for office sector in FY24e. The current share price implies FY23e/24e DPU yields of 6.08%/7.16%.

The Positive

+ Positive Rental reversion. Office occupancy rates remain resilient at 97.4% (-1.2% QoQ), and the retail portfolio stands at 97.9% (+0.4% QoQ). Suntec City Mall achieved a rental reversion of 20.2% in 3Q23, with a 2% YoY increase in foot traffic and a 0.4% YoY rise in sales. Suntec convention revenue surged by 87.3% YoY to S$123.4m, driven by a strong recovery from MICE (Meetings, Incentives, Conferences, and Exhibitions) and advertising. We expect rental reversion to continue trending upwards for the retail sector in FY24e (c.10-15%), and Suntec convention is expected to make a full contribution of c.S$10 million in 1Q24e.

+ Divestment on track. SUN is committed to its current divestment plan, aiming to sell strata units at Suntec Office Tower 1-3 worth S$100 million by the end of FY23. Selling prices are supported by strong demand from end-users and limited supply due to URA’s restrictions on new developments. By 3Q23, approximately 40% of the divestment plan was completed, with prices 20% above book value. This is likely to reduce gearing by 100bps, providing a buffer against potential year-end valuation declines. The management expresses confidence in the Singapore market and foresees no change in cap rates. While gearing improvement from divestment may be offset by overseas asset devaluation, it is expected to remain below the 45% threshold.

The Negative

– The cost of debt has increased to 3.78% (+0.14% QoQ, +37% YoY). Adjusted ICR deteriorated to 2.0x (2Q23: 2.1x), capping the regulatory gearing limit at 45%. We expect the all-in interest cost in FY24e to creep up to 4.25%. There is no commitment to top-up the distributional income using excess cash yet in FY24.