Suntec – CIMB

Private placement to pare down debt

Private placement to raise gross proceeds of S$153m

Maintain Outperform; target price down to S$1.51 (from S$1.59). Suntec REIT completed a private placement of 128.5m units on 11 Dec that was fully subscribed at an issue price of S$1.19/unit. Gross proceeds of S$153m would be chiefly used to pare down debt, lowering its gearing to 31.5% from 34.3%. Our FY10-11 DPU estimates have been diluted by 5% and our DDM target price lowered in tandem to
S$1.51 (from S$1.59) with an intact discount rate of 8.1%. We are positive on this placement in the context of the manager’s overall capital management which minimises dilution for unitholders. We continue to like Suntec REIT for its retail catalysts in 2010 and relative attractiveness (0.64x P/BV and forward yields of 7.3%) vs. its closest peer CCT (0.79x P/BV and yields of 5.6%).

Leverage down to 31.5% (-2.8% pts). Gross proceeds of S$152.9m will be primarily used to pare down debt which totalled some S$1.9bn as at 30 Sep 09. Suntec REIT’s reported gearing of 34.3% would fall to 31.5% after the private placement.

6.5% discount in issue price moderately in line with AREIT and MLT. The issue price represents a discount of 6.5% to the volume-weighted average price of S$1.2724 per unit for trades done on 10 Dec 09. The discount is broadly in line with those given in the last two private placements by AREIT (7.8%) and MLT (5.6%).

Advance distribution for existing unitholders. Existing unitholders (including deferred units issued on 9 Dec 09 as part satisfaction of the purchase consideration for Suntec REIT’s IPO portfolio of properties) will be entitled to receive an advance distribution income for the period 1 Oct-21 Dec 09 (i.e. to the day immediately before the private placement units were issued). New unitholders will only receive distribution income from the date of listing on 22 Dec 09.

Valuation and recommendation

FY10-11 DPU down 5%. After adjusting for dilution from a higher number of units and reduced interest expense, our FY10 DPU estimate decreases by 5% to 9.3cts (from 9.9cts). Our DDM target price has been lowered in tandem to S$1.51 (from S$1.59) with an intact discount rate of 8.1%.

Positive in context of capital management. Although there would be no acquisition in relation to this equity-raising, we remain positive on this placement in the context of the manager’s overall capital management. Debt expiry in Dec 09 will be chunky at S$700m. However, as early as April this year, the manager had already secured an S$825m term loan to refinance the debt, avoiding alternative dilutive rights issuances. The small quantum of the units issued at the current stronger unit price results in much smaller dilution.

FY10 yields of 7.3% still attractive vs. CCT (5.6%). Despite the dilution, Suntec REIT remains our top pick for the sector in anticipation of catalysts from an increased population catchment from two new MRT stations at Suntec City, and direct linkage to the Marina Bay integrated resort by 1H10. Valuations are not demanding at 0.64x P/BV and forward yields of 7.3% vs. its closest peer CCT’s 0.79x P/BV and yields of
5.6%.