Suntec – DBS

Making hay while the sun shines

Story: We believe Suntec’s depressed share price performance in recent months could be due to concerns about the refinancing of its bridging loan that is due Oct 2008 and is already priced in. Its current yields of 6.2- 6.7% are already higher than industry peers’ 5.3-5.8%. To put things into perspective, funding is unlikely to be a problem given its “Baa1” rating and low gearing, the
S$421m to be refinanced represents only 23% of total debt, and any incremental funding costs would have a marginal impact on total average interest cost and earnings.

Point: More importantly, investors should focus on the strong recurrent income stream from the group’s properties. Positive office rental reversions thanks to the sharp surge in rentals in the past 12 months should underpin earnings growth. There is further room for upward earnings revision when the group rejuvenates Park Mall, including developing two adjoining land parcels it bought recently. With gearing at 31%, funding these activities should not stretch its balance sheet significantly.

Relevance: The investment case for Suntec is its strong organic growth amid a positive office rental reversion cycle as well as attractive FY08F and FY09F yields of 6.2-6.7%. There is also room for earnings expansion as Park Mall has not been factored into our estimates. At the current price, valuations are undemanding vis-à-vis its sector peers. Our price target of S$1.98 is adjusted to reflect higher funding cost for the bridging loan, higher terminal cap rate of
4.5% (vs 4% previously), and dilution from CB conversion. Maintain Buy.