21 June 2012

SINGAPORE EQUITY Investment Research

DMG & Partners Research REIT
TiWee Pang +65 6232 3883 Tiwee.pang@sg.oskgroup.com

Company Update

Private Circulation Only

SUNTEC REIT

BUY Price Previous Target

S$1.335 S$1.510 S$1.520

Saving on taxes
Suntec REIT (SUN) recently announced the successful conversion of BFC Development Pte. Ltd. (BFCD) a company which holds Marina Bay Financial Portfolio in Singapore comprises of five quality commercial buildings in the CBD. Has an AUM Centre Towers 1 & 2 and the Marina Bay Link Mall, from a private limited company to a limited liability partnership with the name BFC Development LLP. SUN currently of S$7.6b comprising 2.4m sqft office space and 1.1m sqft retail space holds one-third interest in the MBFC properties through its interest in one-third of the issued share capital of BFCD. Following the conversion, although SUNs interest will remain unchanged, going forward we expect the trust to save an estimated Stock Profile/Statistics Bloomberg Ticker SUN SP annualized tax of S$3.2-3.7m, as BFCD will no longer be subjected to corporate STI 2,856 income tax. We expect this savings in taxes to contribute an additional 0.14S and Issued Share Capital (m) 2,237 0.18S to FY12 and FY13 DPU respectively. Based on our DDM valuation (COE: Market Capitalisation (S$m) 2,987 52 week H | L Price (S$) 1.560 1.050 9.5%; TGR:1.5%) we maintain BUY on this counter with a revised TP of S$1.52. Average Volume (000) 6,429 SUN is currently trading at 6.0% spread to 10-year bond yield which is 108bps and YTD Returns (%) 24.2 366bps above its long term (5.0%) and pre-crisis mean spread (2.4%) respectively, Net gearing (%) 37.4% our TP of S$1.52 translates to a spread of 5.1% and a potential upside of 13.8%.
Commercial REIT Altman Z-Score ROCE/WACC Beta (x) Book Value/share (S) NA 0.5 0.93 1.987

Major Shareholders (%) Suntec City Development Morgan Stanley Asean Investment Corp 6.23 3.95 3.87

Enjoy tax savings by converting to limited liability partnership. By converting to a limited liability partnership (LLP), unitholders of SUN will be able to enjoy tax transparency on the income it receives from the MBFC properties. This is consistent with the tax-free income from other properties held directly by most REITs in Singapore. Possible conversion of ORQ into LLP in the future. Given the success of converting BFCD into a LLP, we believe SUN and its partners in One Raffles Quay (ORQ) will move forward to convert their holding company into another LLP. However, as the conversions of private limited companies into LLPs are subjected to the approval of IRAS on a case by case basis, we currently do not forecast this factor into our model. Additionally, even if the conversion is successful, we expect to see minimal impact on the earnings of FY12.

Share Performance (%) Month 1m 3m 6m 12m Absolute 2.7 6.4 23.0 (9.2) Relative (0.1) 11.3 14.0 (2.7)

6-month Share Price Performance

1.40
1.30 1.20 1.10 1.00

0.90 0.80 0.70 19-Dec-11 19-Jan-12 19-Feb-12 19-Mar-12 19-Apr-12 19-May-12 19-Jun-

FYE Dec (S$m) Gross Revenue Net Property Income Distributable Income Consensus DPU (S) DPU (S) % chg YoY Div Yield (%) ROE (%) ROA (%) Interest Cover (x) P/E (x) P/B (x)

FY10 249.5 193.1 182.5 9.9 7.4 9.7 5.8 2.7 13.5 0.7

FY11 270.3 193.4 220.7 9.5 9.9 0.7 7.4 14.0 8.4 4.5 13.4 0.7

FY12F 263.3 194.5 219.5 9.2 9.8 (1.5) 7.3 25.5 17.0 21.9 13.6 0.7

FY13F 267.9 197.9 227.7 9.0 10.1 2.9 7.5 1.5 1.0 4.5 13.3 0.6

FY14F 293.2 216.7 241.5 9.3 10.6 5.1 7.9 9.1 6.1 4.7 12.6 0.6

Source: Company data and DMG estimates

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Profit And Loss Statem ent FYE Dec (S$m ) Gross Revenue Property Expenses Net Property Incom e Management Fees Trust Expenses EBIT Interest Income Interest Expense Net Incom e Change in fair value of financial derivative Change in fair value of investment properties Total Return For The Period Non-Tax Deductible/(Non-taxable) Items Distributable Incom e Source: Company data and DMG estimates FY10 249.5 (56.4) 193.1 (27.9) (2.7) 162.5 25.3 (81.2) 106.6 248.7 355.3 (172.8) 182.5 FY11 270.3 (76.9) 193.4 (36.1) (5.3) 152.0 23.5 (75.3) 100.2 (5.9) 396.2 490.5 (269.8) 220.7 FY12F 263.3 (68.8) 194.5 (36.5) (3.7) 154.3 18.5 (84.5) 88.3 (208.0) (119.6) 339.1 219.5 FY13F 273.3 (71.4) 201.9 (37.4) (2.6) 162.0 17.4 (84.2) 95.2 (40.5) 54.7 176.9 231.6 FY14F 293.2 (76.5) 216.7 (39.2) (2.7) 174.9 14.3 (90.1) 99.0 186.0 285.1 (41.6) 243.5

Balance Sheet Statem ent FYE Dec (S$m ) Trade And Other Receivables Cash And Cash Equivalent Investment Properties Others Total Assets Trade And Other Payables Interest-bearing borrow ings Others Total Liabilities Net Assets Attributable To Unit Holders Source: Company data and DMG estimates FY10 6.7 52.5 4,452.0 2,140.9 6,652.1 41.1 404.6 2,221.8 2,667.4 3,984.6 0.0 FY11 14.3 104.4 5,098.1 2,299.9 7,516.7 80.9 200.0 2,689.2 2,970.1 4,546.7 0.0 FY12F 10.3 140.3 4,869.1 3,748.6 8,768.4 37.7 419.3 2,461.3 2,918.3 5,850.1 0.0 FY13F 10.2 107.5 4,984.6 3,811.4 8,913.8 39.1 441.6 2,587.6 3,068.4 5,845.5 0.0 FY14F 10.5 101.9 5,221.7 3,699.3 9,033.5 41.9 422.1 2,477.1 2,941.1 6,092.3 0.0

Cash Flow Statem ent FYE Dec (S$m ) Net Operating Cash Flow Net Investing Cash Flow Net Financing Cash Flow Net Increase In Cash And Cash Equivalents Opening Cash Ending Cash Source: Company data and DMG estimates FY10 206.4 (1,172.7) 987.6 21.3 31.2 52.5 FY11 216.7 (5.6) (159.1) 51.9 52.5 104.4 FY12F 246.9 102.2 (313.2) 35.9 104.4 140.3 FY13F 268.9 (140.6) (161.1) (32.8) 140.3 107.5 FY14F 286.7 165.4 (457.7) (5.6) 107.5 101.9

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DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage DISCLAIMERS This research is issued by DMG & Partners Research Pte Ltd and it is for general distribution only. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities. DMG & Partners Research Pte Ltd is a wholly owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK Investment Bank Berhad and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited.

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