Suntec – CIMB

Retail catalysts

• Maintain Outperform. We believe there is room for upside surprises from SUN’s retail segment, from a higher catchment population after the opening of two new MRT stations at Suntec City, and direct linkage to the Marina Bay integrated resort. Additionally, Chinese and Indian tour agencies are starting to market Singapore as a single tour destination over their traditional marketing of Singapore as a stop-over destination. This change should have a significant impact on the length of visitors’ stay in Singapore, and hence retail spending.

• Supply overhang in office; but cost-competitiveness also increases. New office supply of 9.8m over the next five years as well as 400,000-600,000 sf of potential shadow space from 2010 is likely to depress a rental recovery. On the other hand, this development should also improve Singapore’s cost-competitiveness vs. its regional competitors, Hong Kong and Tokyo. We expect continued low rents to support occupancy. A pick-up in leasing volumes in recent months is a sign that occupancy could turn out less depressed than expected.

• DDM-derived target price of S$1.07 (discount 9.4%). We like Suntec REIT for its: 1) quality office and retail portfolio; 2) low leverage of 34.4%; 3) absence of refinancing concerns until 2011; and 4) severely discounted price for a possible fall in asset values. We believe that downside risks for the office sector have been factored into its share price while upside surprises from its retail segment have largely been neglected.