Suntec – UOBKH

Benefitting From Improved Connectivity To Suntec City

Suntec REIT invests in income-producing real estate used for retail and/or office purposes. Its initial portfolio comprises Suntec City Mall and Suntec City Office Towers, which are linked to the Suntec Singapore International Convention and Exhibition Centre. The two properties are within walking distance from the City Hall MRT station. Suntec REIT subsequently acquired Park Mall next to Dhoby Ghaut MRT station in Oct 05 and niche retail and dining establishment Chijmes in Dec 05. Suntec REIT’s family rating is Baa1 from Moody’s Investor Service.

Quality of portfolio enhanced by improved connectivity. Singapore Tourism Board has set up a S$170m incentive scheme to support business events and has embarked on a three-year global marketing campaign to showcase Singapore as a MICE (meetings, incentive travel, conventions and exhibitions) destination. Suntec City Mall will benefit from increased shopper traffic due to its proximity to Suntec Singapore International Convention and Exhibition Centre. Accessibility to Suntec City will also improve as Suntec City will be served by the Esplanade and Promenade MRT stations when the new Circle line is ready in 2010.

Benefitting from positive rental reversion for office space. Suntec City Office Towers and Park Mall recorded average passing rentals of S$5.30 and S$4.70psf pm in 1QFY08, affected by leases signed in FY05 and FY06. We expect average passing rentals to revert to S$10 and S$8 psf pm for Suntec City Office Towers and Park Mall respectively by FY10. Suntec REIT raised S$173.2m through a placement of 120m new shares at S$1.50 in Oct 06. It has acquired a total of 54,040sf of additional office space at Suntec City for S$102.3m by using proceeds from the placement.

Upgrade to BUY from HOLD. We like Suntec REIT for its balanced portfolio of quality retail and office properties. It provides FY08 distribution yield of 6.1%, an attractive spread of 3.7% over the 10-year Singapore government bond yield at 2.4%. Our target price is S$2.18 based on the two-stage dividend discount model (required rate of return: 7.85%, terminal growth: 2.5%).