Upgrade to NEUTRAL
Price (09 Jul 13 , S$) 2.20
TP (prev. TP S$) 2.48 (2.48)
Valuations more reasonable post correction, but business park exposure still at risk, in our view
● AREIT has been one of the worst performers within the SREITs sector with the recent sell-off, down 20% since end April (14% relative). With now 13% potential upside to our S$2.48 TP, we upgrade AREIT from an Underperform to NEUTRAL reflecting the more reasonable risk-reward at current levels.
● We believe the 6.5% FY14 yield and its relatively longer weighted average lease expiry (WALE) profile of 3.7 years should provide some downside support at these levels in the near term.
● Near-term DPU growth will be underpinned by AEIs, as well as the organic rent reversions—21% of AREIT's revenue is due for renewal in FY14, although management expects a more modest reversion.
● Longer-term growth outlook is still challenging in an increasingly tougher acquisition environment. We believe management's rising focus on growing its overseas portfolio could be negatively perceived by the market as AREIT's risk profile may change. In the industrial space, we prefer MLT (logistics sector is more defensive) and MINT (more attractive risk-reward), yielding 6.6% and 7.2%, respectively.
AREIT has fallen 20% (14% relative to STI) since end-April
In light of the recent sell-off led by the falling bond prices, S-REITs have been sold off, and within this space, AREIT has been one of the worst performers, falling 20% since the end of April (pre-recent sell-down), underperforming the STI by 14%.
Risk-reward now slightly more attractive with 13% potential upside; we upgrade AREIT to NEUTRAL
Given the recent sell-off, we now have 13% potential upside to our S$2.48 target price. We are hence upgrading from an Underperform to NEUTRAL to reflect the more reasonable risk-reward at current levels. The 6.5% yield and relatively longer weighted average lease expiry (WALE) profile of 3.7 years should provide some downside support at these levels in the near term.
Near-term outlook remains intact, underpinned by AEIs
Near-term growth should be underpinned by AEIs, with the development of DBS Asia Hub Phase II (S$21.8 mn cost) and AEIs at Techpoint and 5 Toh Guan Road. The total estimated cost isS$55.2 mn, including existing AEI works at 31 Ubi Rd 1, Xilin Districentre D, 1 @ CBP and 31 IBP. Meanwhile, DPU growth is also supported as 21% of AREIT's revenue is due for renewal in FY14 and management expects positive rental reversions although at a more modest pace.
But longer-term growth outlook remains challenging
While balance sheet remains favourable, with a low gearing of ~30% (over 75% of debt is fixed), in our view, the operating outlook remains relatively weak, particularly for business parks, in which AREIT has the largest exposure (60%, including high-tech industrial properties). System vacancy of 20.8% for business parks and strong completion pipeline (31% of total supply) remains a potential threat to rent outlook.
Meanwhile, growth via acquisition strategy remains challenging, and the increasing focus on overseas acquisitions (China and Malaysia look interesting) could be perceived negatively by the market as AREIT's risk profile may change. Management will also be looking into Built-to-Suit (BTS) opportunities and greenfield projects.
Within the industrial space, we prefer MLT (the logistics sector is more defensive) and MINT (more attractive risk-reward) which are yielding 6.6% and 7.2%, respectively.
Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 11/07/13