Suntec – BT

Suntec Reit
Nov 30 close: $1.55
BNP PARIBAS RESEARCH, Nov 29


SUNTEC Reit has tumbled 14 per cent over past month: The share price of Suntec Reit has tumbled 14 per cent since the end of October, in line with the steep correction in the Straits Times Index (STI). We believe concerns over prior yield compression and the narrowed spread against risk-free instruments have been overstated.

To ascertain if this sell-down has been overdone, we used the dividend yield spread (over 10-year government bond yields) highs recorded during the June 2006 correction to determine the floor price of Suntec Reit. At current valuations, we think Suntec Reit has been oversold.

Trading at oversold levels: Suntec now trades at an FY08 yield of 6 per cent (up from 5.1 per cent as of Nov 1), or 307bp above the 10-year risk-free rate. This compares favourably against the previous peak (on June 15, 2006), where the stock traded at a yield spread high of 291bp and 223bp at IPO (in December 2004).

Benchmarking against a yield spread of 291bp, our estimated floor price is $1.62. From a required returns perspective, we think the stock has overshot its floor price by 2.5 per cent. Premising on a yield spread of 223bp, the floor price would have been $1.84, offering a 16.4 per cent upside to its floor price.

No downward pressure from US FFR on Singapore rates: Our US counterparts anticipate a further 25bp reduction in the Fed fund rate in December, following October’s 25bp cut. We, however, do not foresee any changes in Singapore’s risk-free rate. There is no statistical correlation between Singapore’s 10-year risk-free yields and the US FFR. This cements our view that any expansionary monetary policy measures by the US Fed is not likely to broaden the spread between S-Reit yields and the risk-free rate.

Time to say good BUY; TP of $2.39: We maintain our BUY rating and a target price of $2.39. Prospects for Suntec Reit to expand organically remain strong considering that 70 per cent of its office portfolio leases are due for expiry in FY08-09.

The stock currently trades at a 28 per cent discount to its NAV of $2.20. Offering a prospective yield of 6 per cent, we believe the stock now trades at oversold levels, which provides investors a good level for entry.
BUY