■ Sell-off in current quarter looks overdone vs. yield and growth outlook
■ We expect industry-leading DPU growth of 8-9% for FY16-17
■ Upgrade to Outperform (2); raise TP to SGD2.54
Since end-September 2015, AREIT units have fallen by 4.3% vs. a gain of 4.5% for the FFSTI over the same period. We believe the selldown looks overdone.
What's the impact:
The volatility of AREIT’s unit price (vs. prices of the large-cap S-REITs) is nothing new, in our view, but some investor unease over the acquisition of the AUD1bn Australian logistics portfolio (announced on 18 September 2015) could have contributed to the underperformance of the units. AREIT will pay a 6.6% premium for the portfolio (in an arguably unfamiliar market), so it was no surprise to us that the strongest pushback on the deal came from those clients familiar with the Australian property market and global real estate funds. We found that Singapore-based fund managers were more receptive because the acquisition (at a net-property income [NPI] yield of 6%, after transaction costs) would be solidly DPU accretive (by 3-3.5%, according to AREIT estimates).
We share concerns over the price and the SGD component of the funding (through the issuance of 4.75% SGD300m of perpetual securities), but we believe these are outweighed by the compelling positive features such as immediate DPU accretion (with annual rental escalations of 3.3% and some scope to improve the 94.4% occupancy rate) and big uplift to the remaining leasehold tenure of the overall portfolio (by adding AUD1bn of freehold properties in Australia to the relatively short [about 48 years according to our estimates] leasehold tenure of the Singapore portfolio).
We revise up our FY16-18 DPU forecasts by 1-3% after incorporating the Australian acquisition, the issuance of the perpetual securities and the 2Q FY16 results into our forecasts. We estimate that AREIT’s DPU growth for FY16-17 will be among the strongest in the sector. We raise our 12-month target price, pegged to a DDM valuation, to SGD2.54 from SGD2.40, after incorporating our new DPU forecasts and a higher blended remaining leasehold tenure for the portfolio of 60 years (vs. 48 previously).
What we recommend:
We upgrade our rating to Outperform (2) from Hold (3) for AREIT’s attractive combination of DPU yields of 7.1-7.7% and robust DPU growth of 8-9% for FY16-17. We also upgrade our rating for the industrial-property REIT sector to Positive from Neutral, on the back of AREIT’s heavy weighting in the sector. A risk to our call would be the onset of a prolonged recession in Singapore and the Asia region.
How we differ:
Our revised DPU forecasts for FY17-18 are about 7% higher than those of the Bloomberg consensus as we believe AREIT’s DPU-growth potential could be underappreciated. (Read Report)
Source : Daiwa Capital Markets