Suntec REIT

OCBC on 19 June 2012

Suntec REIT announced last Friday that BFC Development Pte Ltd, which owns MBFC Properties, had been successfully converted from a private limited company to a limited liability partnership. As a limited liability partnership is tax transparent for Singapore tax purposes, Suntec REIT will enjoy tax transparency on its share of income from MBFC Properties going forward. This is positive for unitholders as the distributable income is likely to be higher now that the income generated will no longer be subject to corporate tax. We now factor in the DPU uplift from higher contribution from MBFC Properties following the conversion. This in turn raises our DDM-based fair value to S$1.23 from S$1.20 previously. However, as Suntec REIT appears to be fairly priced at current level, we retain our HOLD rating.

MBFC properties holding company obtains LLP status
Suntec REIT announced last Friday that BFC Development Pte Ltd (BFCD PL), which owns MBFC Properties, had been successfully converted from a private limited company to a limited liability partnership with the name BFC Development LLP (BFCD LLP). Suntec REIT had held one-third interest in BFCD PL. Following the conversion, the REIT now holds one-third interest in BFCD LLP as a partner.

Positive impact from the conversion
As a limited liability partnership is tax transparent for Singapore tax purposes, this means that Suntec REIT will enjoy tax transparency on its share of income from MBFC Properties going forward (adjustments are not retrospective). This is positive for unitholders as the distributable income is likely to be higher now that the income generated will no longer be subject to corporate tax. We understand that dividend income (cash flow) and share of profits will benefit from the conversion, whereas income tax for income support will still be ongoing. Based on our estimates, FY12-13F DPU may get a boost of 0.11-0.17 S cents, or 1.2-1.9% increase. This, together with the GST refund from income support expected in the coming quarters, will likely cushion a temporary dip in DPU from the asset enhancement works at Suntec City, which began at the start of Jun.

Maintain HOLD on valuation grounds
We factor in the DPU uplift from higher contribution from MBFC Properties. This in turn raises our DDM-based fair value to S$1.23 from S$1.20 previously. We note that Suntec REIT’s unit price has outshone both the STI (+6.7%) and S-REIT Index (+12.7%) with a 23.3% gain YTD as a result of better-than-expected financial performance and excellent execution by management. At current level, however, we believe that Suntec REIT is fairly priced on a total return basis. As such, we retain our HOLD rating.