Suntec – OCBC
A Quay Acquisition
One Raffles Quay to be accretive. In Suntec REIT’s (Suntec) 3Q07 results, it announced its intention to acquire a one-third stake in One Raffles Quay (ORQ) for S$941.5m from Cheung Kong. The acquisition includes a rental top up of S$103.48m. No rental details were provided but we estimate that the acquisition should be marginally accretive. However, the market was less convinced and sold it down. To recap, we saw the best way to view the rental top up is as a form of a discount. ORQ’s actual value net of the income support is thus S$838m, or a reasonable S$1,877 psf. Our views appeared to be vindicated with the recent details released by Suntec, which showed an accretion of 1-8% depending on cost and proportion of debt/equity with respect to the funding of the acquisition.
ORQ NPI yield at 4.2%. We estimate the rental that Suntec will get from ORQ (including the income support) to be about S$8.30psf/mth. Grade A office presently should be able to achieve S$12-13psf/mth. So there is some upside potential to Suntec albeit in the middle term.
Financing details out. Suntec has revealed its financing options for the ORQ acquisition. 10% will be in the form of new units issued to the vendor, with the balance 90% to be in either straight debt or a combination of debt and convertible bond (CB). The maximum CB to be issued will be S$450m with its conversion price at 25% to 50% premium above the last traded unit price and a coupon of between 2.0% and 4.0%. All details are likely to be finalised at book building.
Maintain BUY and fair value of S$2.18. Since our ratings and fair value upgrade in end July, Suntec has done well, appreciating by about 3.0%. The investment case for Suntec remains intact. It is well positioned to benefit from the retail and office sector strong performance as well as from the F1 race in 2008 and the opening of Marina Integrated Resort in 2009. Finally in so far as acquisition growth is concerned, the ORQ transaction with its sponsor implies that future acquisition of assets from its sponsor’s development in the nearby new Business Financial Centre (BFC) is also assured. We thus retain our target size of S$5.5b and our fair value of S$2.18. Maintain BUY.