Suntec REIT - Raises stake in Suntec Convention (DBSVickers)

BUY S$1.38 STI : 2,850.59

Price Target : 12-Month S$ 1.69

Reason for Report : Company update

Potential Catalyst: Organic growth and accretive acquisitions

DBSV vs Consensus: Slightly below

• Takes effective 60.8% stake in Suntec Convention

• Accretive deal but impact depends on extent of AEI

• Maintain Buy and S$1.69 TP

Takes an effective 60.8% stake in Suntec Convention Centre. Suntec has announced it is buying a 51% stake in Harmony Partners Investments Ltd, which owns 80% of Suntec Spore International Convention Exhibition Centre for S$114.75m. Including its earlier 20% interest in the development, the deal will give the group an effective 60.8% stake in the convention centre. The vendors include Bright Assets Enterprise, Crescendo Investments, KCY Investments and Clavon Capital. The acquisition value is based on the latest valuation (by Colliers International) of S$400m for the property (vs the purchase valuation of $235m in Aug 2009). Suntec Convention comprises about 1msf of floor space spread over 6 levels.

Deal seems fair but accretion quantum depends on extent of AEI. We see the deal as accretive to Suntec given that the S$400m translates to an implied value of S$400psf for the prime floor space. Gaining majority ownership of the property would also enable the group to conduct AEI activities to improve the usage and efficiency of the property together with adjoining Suntec Mall more easily. However, the extent of the accretion would depend on further details on the potential AEI initiatives and capex required during this period. Suntec intends to fund the acquisition through debt, which will raise their see-through gearing to 41.6%, slightly ahead to the Sreit sector gearing level. In terms of immediate impact, there will be a boost to its book NAV from S$1.804 to S$1.87 given the higher value of its initial 20% stake, post revaluation. In addition, the greater ownership and contributions would increase its DPU by 1.2%.

Maintain Buy. We are retaining our Buy call on the stock. Suntec offers FY11 and FY12 DPU yield of 6.6% and is trading at undemanding 0.77x P/Bk NAV. Maintain Buy with TP of S$1.69.