Suntec – BNP

1QFY08 preview and outlook

We expect 1QFY08 net property income of SGD44.8m, up 29% y-y, arising from positive rental renewals and maiden contributions from ORQ. The acquisition of ORQ is mildly yield accretive given its fixed-lease structure until FY11. The stock now trades at an FY08E yield of 6.2%, 390bp above 10-year government bond yields. Maintain BUY; TP of SGD2.39.

Expect robust 1QFY08 earnings growth
Suntec is scheduled to report 1QFY08 results on 30 January. We expect revenue and net property income of SGD60.5m (up 31.7% y-y, 18.5% q-q) and SGD44.8m (up 29.0% y-y, 22.4% q-q). The strong performance is likely to be driven by good organic growth arising from positive rental renewals from Suntec City and maiden contributions from One Raffles Quay (ORQ).

Considerable yield accretion for ORQ beyond FY11
Based on our estimated SGD8.80/sqft assumption, ORQ is forecast to offer a net property income (NPI) yield of 4.2%, in turn contributing 14% of the group’s rental income. Due to its fixed-lease structure, ORQ should be mildly yield accretive between FY08 and FY11. Assuming calling rents remain at the current SGD15-18/sqft, we expect considerable rental reversionary growth when leases for ORQ are due for renewal in FY11.

Strata buyback programme gaining some traction
The acquisition programme to buy back more Suntec strata office units has started gaining traction. Last month, Suntec REIT acquired about 28,000 sqft of Suntec City office space at an NPI yield of 5%. Nevertheless, we continue to foresee elevated headwinds in its acquisition programme as there is an increasing number of Suntec strata proprietors seeking prices above the SGD2,500/sqft level. This comes in the shadow of their lock-in of gross rents below the SGD12.50/sqft per month level, which otherwise offers the REIT an NPI yield of 5%.

Ample debt capacity to expand portfolio by 26%
With the acquisition of ORQ, Suntec REIT has a gearing of 32%. This gives it a debt capacity of SGD1.45b, assuming a target gearing of 45%. We have factored in an annual buyback of 50,000 sqft of strata office space between FY08 and FY12 at an NPI yield of 5%. Exhibit 3 illustrates the different share-placement levels at varying yields, which is required for Suntec REIT to achieve accretion to its DPU.

BUY, with TP of SGD2.39
We maintain our BUY rating and a target price of SGD2.39. Prospects for Suntec REIT to expand organically remain strong considering 70% of its office portfolio leases are due for expiry in FY08-09. The stock now trades at an FY08E yield of 6.2%, 380bp above government bond yields.