Suntec – CIMB

Tax transparency for MBFC 1

Tax transparency for MBFC 1 should allow savings translating to 2-3% of DPU annually. We do not dismiss the possibility of similar conversions and structures for ORQ and MBFC 2, which could allow less tax leakages and potential simplification ofholding structures.

We raise DPUs and DDM-based target price (discount rate: 8.1%) factoring in tax savings from Suntec REIT’s one-third stake in MBFC Phase 1. Maintain Outperform on favourable risk-reward. We see catalysts from earlier bottoming ofoffice market and further tax savings.

What Happened

Suntec REIT has announced that BFC Development Pte Ltd, the entity which holds MBFC Phase 1 has been successfully converted to BFC Development Limited Liability Partnership. This will allow it to obtain tax transparency and not pay corporate tax on its income from its one-third stake in MBFC Phase 1.

What We Think

We expect this development to result in savings of about S$4m-5m (2-3%) for Suntec REIT annually. Savings are not retrospective, implying no claw-backs for previous taxes paid.

Management’s efforts on this are commendable. Previously, the tax leakage, income support and complex holding structures for ORQ and MBFC Phase 1were some of the key contentionpoints that some investors had when they compared K-REIT’s and Suntec REIT’s portfolios against CCT’s. We do not dismiss the possibility of a conversion for the holding company of ORQ and the use of a similar structure for a potential acquisition of MBFC Phase 2 for increased tax savings.

If these changes take place, not only will there be less tax leakages, but overall holding structures fortheportfolio could be less complex (e.g. unwinding of shareholders’ loan for tax shelter) to facilitate investors’ understanding and a potential narrowingin valuation gap against CCT.

What You Should Do

Overall, we view this news positively for both its tangible and intangible benefits. Maintain Outperform on favourable risk-reward from a potential bottoming of the office market and cheap valuations (0.7x P/BV and 6.9% yield).