Outperformance could continue
Target price Increased from 2.47 SGD 2.61
Closing price September 27, 2013 SGD 2.34
Action: Upgrading to Buy; outperformance could continue
AREIT has outperformed the other REITs year to date (-1.3%, vs. FSTREI’s -5.6%), and we think the outperformance could continue considering its relatively defensive yield, decent growth profile and strong balance sheet. We upgrade our rating to Buy.
Catalyst: Business park demand remains focus
Besides AREIT’s commitment at the newly completed Nexus and the upcoming Kallang development, we think the market will likely focus on the demand for the business park portfolio in the coming quarters, especially at 1 CBP Ave 1 and 31 IBP, where asset enhancements are taking place.
Valuation: TP raised to SGD2.61 (from SGD2.47)
We raise our TP to SGD2.61 (from SGD2.47) to principally reflect a lower ascribed FY15F yield spread of 3.1pp (from 4.5pp), offset by a lower NAV estimate of SGD2.31 (from SGD2.44). Our “true” yield analysis suggests AREIT still offers a reasonable return over the long-term risk-free rate if we were to remove all short-term distribution boosts (“true” yield spread 3.2pp vs. trough spread 2.6pp). Coupled with above-average projected DPU growth (3-year CAGR = 4.5%) and low gearing (0.29x as of end-June), we believe AREIT’s overall quality deserves a premium valuation. As a cross-check, our current TP translates into a P/B multiple of 1.3x based on end-June book value of SGD1.94, which is in line with the average multiple at which AREIT has traded since 2003. Our TP of SGD2.61 implies a potential total return of 17.8% (potential upside 11.5% + FY15F yield 6.3%), and we upgrade to Buy from Neutral.
Publish date: 02/10/13