Suntec – DBSV

Buys one third share of MBFC1

• Results in line, topline +2.1% on higher office income

• Buying MBFC1 for $2400psf

• Maintain Buy call, TP $1.66

No surprises in Q3 results. Revenue was up 2.1% yoy and 1.3% qoq, lifted by higher office occupancy of 98.5% and better office rental income. Office rents at Suntec office improved to $7.39psf/mth. NPI was up 7.6% yoy on lower cost to income ratio of 20%. However, distribution income dipped 3.2% to $46.2m (DPU: 2.5cts) largely on increased interest expenses. The group revalued up portfolio by 3.6% translating to NAV of $1.828/share. Going forward, Suntec has c14% of office and 27% of retail NLA due for reversion in 2011 and we expect office rents to show some uptick while retail component to remain stable.

Interest savings from refinancing. Recent refinancing exercise of $700m due in FY12 are likely to lower its current overall cost of debt of 3.77% as the new loans were concluded at a lower spread of 1.5%, as well as smoothen out the group’s debt maturity profile. The impact is likely to be felt from FY11.

Buys 1/3rd MBFC1 at $2400psf. Suntec has announced its plan to buy a one third share of MBFC1 from Cheung Kong for $1495.8m, inclusive of a $113.9m income support payable over 60 months or $2400psf (excl the income support payable). This deal is viewed as a long-term strategic positive as enhance the overall quality of its office portfolio with a prime office property. The actual impact is difficult to ascertain pending details of financing to be released. The deal is subject to minority shareholder’s approval.

Retain current recommendation. We are tweaking our FY11 numbers by 3.1% to reflect the impact of recent refinancing exercise but exclude the effect of the MBFC1 acquisition. Maintain Buy call pending more information on the transaction. Based on FY10 and FY11 DPU of 9.8cts and 9.7cts, Suntec is trading at decent DPU yields of 6.3-6.2%. Our target price of $1.66 offers 12% total return.