Intrinsic Value S$1.78
Prev Closing Price S$1.54
More Plans in the Pipeline?
AIMS AMP Capital Industrial REIT’s (AA REIT) 2Q FY14 gross revenue and DPU rose 24.8% YoY and 10% YoY respectively to S$26.9m and 2.75 S cents on the back of maiden contribution from 20 Gul Way Phase Two and higher rental income from 27 Penjuru Lane. 1H FY14 gross revenue and DPU now form 49.9% and 47.7% of our full year forecasts.
AA REIT is now reaping the fruits of the 20 Gul Way Phase Two following its TOP in May 2013. We project FY15 DPU to be improved on the back of their existing project pipeline: 103 Defu Land and Phase 2E and Three of 20 Gul Way. The former project is scheduled to TOP in May 2014 with income contribution from September 2014 onwards. Phase 2E is estimated to be completed around June/July 2014 while Phase Three will be completed in 2H 2014. We expect these projects to potentially add another 1 S cent DPU annually to shareholders.
We speculate that the company is looking at redeveloping or doing alteration and addition work on three of the lease expiring assets in Singapore. In Australia, AA REIT is probably looking at some of its sponsor’s assets. We look forward to its future plans. Recommend Invest with an intrinsic value of S$1.78.
Results Summary: 2Q net income climbed 44.9% YoY to S$13.4m on the back of 23.6% YoY increase in net property income and a lower increase in management and other trust expenses. AA REIT also recorded a S$5.9m increase in fair value of investment properties, mainly due to higher valuation in 8 and 10 Pandan Crescent. Borrowings decreased by S$79.8m over the last six months to S$277m thanks to the proceeds received from the private placement However, we expect the amount to rise back due to the development cost from the existing two projects (the outstanding amount is probably around S$90m). Debt/total assets after the completion of the projects is likely to be around 30%.
Company Update: AA REIT will start to market the Defu Lane industrial spaces closer to the end of the year while three of the properties’ leases with the master tenant will expire around CY 2Q-4Q 2014. The assets are 10 Changi South Lane, 10 Soon Lee Road and 11 Changi South St 3. AA REIT is currently querying if the master tenants will continue with the lease. We may eventually see more conversion towards the multi-tenanted type given the rental uplift.
Some Plans in Mind?: AA REIT’s existing project pipeline will end around end of next year and we reckon that the company may announce some asset redevelopment or strategic acquisition (in Singapore or Australia) over the next three quarters. In Singapore, we believe there is a possibility that AA REIT will seek to redevelop or perform alteration and addition works on the three lease expiring assets. The possibility of any acquisition in Singapore is relatively low as AA REIT is mindful of the asset prices.
In Australia, AA REIT is probably looking at some of its sponsor’s assets. We are in favor of yield accretive acquisitions that are bundled with long term leases and steady rental escalation. This will help to bring about better DPU stability to shareholders.
Industry Trend: We noted a decline in the average REITs’ yield over the last two months following the surprise move by the FED to maintain the pace of stimulus. We reckon that interest rates are likely to remain at current levels till end of this year, which may help to generate some short term boost for the industry.
Forecast and Valuation: Shareholders have seen the additional DPU contribution from Phase Two of 20 Gul Way and will probably receive more from the existing project pipeline. We remain optimistic about the AA REIT’s DPU trend and look forward to its future plans, particularly in Australia. Maintain Invest with an intrinsic value of S$1.78.