Suntec – DBS

Strengthening foothold in the Marina area

• Maiden exposure to Suntec Convention
• Long term strategic rewards offset near term neutral earnings impact
• Maintain Buy with TP of $1.18

Takes 20% stake in Suntec Convention. Suntec is investing S$25m for a 20% share of ARA Harmony Fund, a private equity fund set up to own the Suntec Convention Centre. Under the terms of the agreement, Harmony will pay S$235m for the landmark asset with c.1msf of convention space. The fund will be managed by listed ARA Asset Management via asset and convention and exhibition service agreements.

Small investment, strategic positioning. Although the purchase is not expected to have any significant impact in the near term, we view this acquisition positively given i) firstly, it would deepen the group’s presence in the rapidly expanding convention hub in the Marina area; and ii) secondly, an effective controlling ownership of the entire Suntec City mixed development asset could open opportunities for future enhancements in the long run. Furthermore, we see potential for further streamlining of ownership that would provide Suntec with more synergies and economies of scale. In terms of financial impact, this purchase will raise Suntec’s leverage ratio marginally from 33.9% to 34.2%.

Maintain Buy. Suntec’s valuation remains inexpensive with at 0.55x P/bk NAV and DPU yield of 9.8-8.1% over FY09-10, even after assuming further rental depreciation of office rentals. Our DCF-backed TP of $1.18 offers 17% upside.