• Raising 12-month TP to SGD2.40 from SGD2.28
• Upgrading to Hold (3)
■ What's new
After the 9% correction in the unit price since mid-April 2015 (following the 4Q FY15 results announcement), AREIT units now look fairly valued to us. We fine-tune our revenue assumptions and incorporate our revenue forecasts for all of AREIT’s recently completed and pending asset-enhancement initiatives (AEIs).
■ What's the impact
We fine-tune our gross-revenue assumptions by property after incorporating data from AREIT’s FY15 annual report (published on 12 June). After stripping away the impact from acquisitions and development properties for FY15, we noticed that the underlying performance of the portfolio, judging solely from the YoY gross income growth by property, was subdued, across all segments. The stagnant trend was obvious after the release of the 4Q FY15 results, but was confirmed at the granular level with the release of the annual report.
One major factor impeding growth at the net-property income (NPI) level was the conversion of master-lease properties into multi-tenanted buildings (MTBs). This negative trend could be seen clearly in the logistics & distribution centres segment, which suffered a 6% YoY decline in NPI, arising largely from higher expenses (we suspect much of the increase had to do with a higher mix of MTBs). This segment also saw several properties with low occupancy rates (19-70%) that were 100% occupied in the previous year (clear evidence, again, of having more MTBs in the portfolio). Low occupancy rates were also associated with properties undergoing AEI work.
We noticed that most of AREIT’s recent AEIs were in the business & science-park properties and high specification industrial properties segments, which is consistent with management’s strategy of increasing exposure and focus on these higher value segments.
We have also increased our revenue contribution assumptions for all the AEIs that have been announced. Of the SGD60m worth of AEIs that have been completed recently, and the SGD91.2m scheduled for completion by 4Q 2015, we have assumed ROIs of 7-10%. After incorporating all of our assumptions, we are raising our FY16-18 DPU forecasts by 2.3-4.7%. As such, we also raise our DDMderived 12-month target price to SGD2.40 from SGD2.28.
■ What we recommend
We upgrade our rating to Hold (3) from Underperform (4), and believe AREIT’s valuations are now on par with those of its industrial-property peers. An upside risk for AREIT would be the announcement of a highly DPU-accretive acquisition from its sponsor, while a downside risk could be persistently high vacancy rates in its portfolio. Our top pick in this space is still Mapletree Industrial Trust (MINT SP, SGD1.55, Outperform ).
■ How we differ
After this rating change, we move back to consensus (about 50% of the brokers on Bloomberg currently have a Hold rating, with the rest evenly split between Buy and Sell). (Read Report)
Source : Daiwa Capital Markets