Suntec REIT

Kim Eng on 25 June 2012

Tax transparency. Suntec REIT recently announced that it has successfully converted the vehicle which holds Marina Bay Financial Centre Phase 1 (MBFC1) from a private limited to a LLP (limited liability partnership) structure, which grants it tax transparent status. Previously, Suntec had to pay 17% corporate tax rate on rental income generated by MBFC1. The new tax structure took effect from 16 Jun 2012.

FY12-15F DPU up by 0.8-1.5%. Based on our estimates, Suntec will enjoy tax savings of SGD2.8-5.2m for FY12-15F, adding 0.8-1.5% to our forecasted DPU. We understand that the restructuring of One Raffles Quay (ORQ) into a similar tax-efficient LLP structure may not happen in the near term and has not factored this into our estimates (estimate boost of another SGD1.7-3.3m if allowed).

Remaking of SSICEC. Suntec will be closing the Suntec Singapore International Convention and Exhibition Centre (SSICEC) for a major overhaul in October this year. The six-month closure, the first major renovation since 1997, aims to bring the 17-year-old venue up to date and will cost SGD180m. All seven floors will be spruced up, with a grand entrance added on Level Three, and restaurants and shops on

Levels One and Two. The number of meeting rooms will increase from 31 to 46, and all will be fitted with Wi-Fi connection. Remaking of SCM. Suntec will spend another SGD230m to remake Suntec City Mall (SCM). Work is scheduled to start in mid-2012 and will wrap up by mid-2015. It will increase SCM’s NLA to 980,000 sq ft from the current 855,000 sq ft. Tenant mix will also be revitalised with more higher-yield mini-anchor stores and F&B outlets. Upon completion, we expect the annual rental income of SCM to be uplifed by SGD32m, boosting from FY11’s SGD103m to SGD135m.

TP increased by ~6% to SGD1.37, maintain HOLD. After factoring in the tax savings, our target price for Suntec goes up by ~6% to SGD1.37. The stock currently trades at 0.7x FY12F book and 7% FY12F yield. Downside risks include worse-than-expected average rentals for SCM and concentration risk on Suntec City. Reiterate HOLD.