Suntec – CIMB

Lower dividends for lower gearing

SUN announced that it has placed out 218m new units at an issue price of S$1.605 per unit. According to its manager, the gross proceeds will be used to pay down debt. Although gearing will be lowered to 35%, DPU for FY14-15 is expected to drop correspondingly, by 6.8%. We maintain our Add rating with a lower DDM-based (discount rate: 8.0%) target price after incorporating the DPU dilution. Catalysts are still expected from strong earnings from the Phase 1 and 2 of the completed AEI at Suntec City and additional earnings from Leighton Tower in the more long term scenario.

What Happened

SUN just announced a placement of 218m new units (c.9.6% of its share base) at an issue price of S$1.605 apiece to a consortium of institutional and other investors. Gross proceeds will approximate S$350m with net proceeds of S$341.4m, after deducting underwriting, selling, management-fee and other expenses. The issue price represents a 5.3% discount to its last closing price. According to SUN’s manager, the gross proceeds (S$341.4m) will be used to repay debt.

What We Think

An estimated S$780m of SUN’s debt (c.24% of total debt) is due for refinancing this year. Using gross proceeds from this placement and from a recent issue of S$310m medium-term notes (at 3.35% due in 2020), it can repay more than 83% of its debt due in FY14. With the paydown, its FY14 leverage is expected to dip to 35% from its last reported 38% in 4Q13. Although we are mildly surprised by this placement, particularly since interest costs are still low (SUN’s all-in cost was estimated at 2.5% in 4Q13), we believe that the purpose of the placement is to diversify SUN’s sources of funding, while lowering its gearing, before any hike in interest rates. However, as a result of this placement, DPU could be diluted by 6.8% for FY14-15. Accordingly, we lower our DDM-based target price to S$1.83.

What You Should Do

Although we did not expect the placement, we maintain our Add rating, in view of SUN’s bright earnings prospects over the next few years, supported by completed AEI at Suntec City and additional income from Leighton Tower in 2016.