Suntec REIT: Up stake in Convention and Exhibition business (DMG)

(BUY, S$1.38, TP S$1.74)

Purchase 51% stake in Harmony Partners Investments (HPI). Suntec REIT has entered into a share sale agreement with an investor group – Bright Assets Enterprises, Crescendo Investments Group, KCY Investments, and Clavon Capital – to acquire a 51% stake in HPI for S$114.75m. By virtue of HPI’s 80% stake as well as Suntec REIT’s 20% stake in Suntec Singapore International Convention & Exhibition Centure (Suntec Singapore), Suntec REIT will have effective interest of 60.8% in Suntec Singapore following the completion of the acquisition expected on 18 Aug 2011. The entire acquisition will be funded solely by debt. Based on cost of debt of 3.3%, we raised our FY11-12 DPU by 0.2-1.2% respectively. Maintain BUY with higher TP of S$1.74.

Implied acquisition value is less than open market value. The acquisition price of HPI implies that Suntec Singapore is worth S$281m, which is ~30% discount to open market value of S$400m derived from independent valuation exercise carried out by Colliers International on 1

Aug 2011. The management indicated that the pro-forma DPU accretion to be ~0.12S¢ on the back of 100% debt funding. Separately, we estimate the total gearing of Suntec REIT will hit 39.0% by end FY11 from current 38.4% level due to the acquisition of a 51% stake in HPI. Hence, we think it is likely that Suntec REIT will have to raise fresh equity funds should it undertake any major AEI works or acquisitions.

Key risks from global recession. We maintain an optimistic outlook on Suntec REIT on the back of positive rental reversion which will commence next year and relatively undemanding FY12 yield spread at ~5.2% vs pre-crisis mean spread of 2.4% and six-year mean spread of 4.8%. However, should there be a global recession, office, hospitality and industrial REITS will be the worst hit. Thus, our top pick within the S-REIT remains Frasers Centrepoint Trust (BUY, TP S$1.79), which holds defensive suburban mall assets, possesses growth from strong rental reversion and completion of Causeway Point AEI, and is trading at undemanding FY12 yield spread of ~5.2% vs its pre-crisis mean spread of 1.8%.