Target price:SGD2.30 (from SGD2.45)
Buffered From Downside
Capital value at risk. We see industrial REITs facing major downside risks from the impending hike in interest rates and possible recalibration of over-inflated property prices – both of which can drag down NAV. The physical capital values of industrial properties have doubled in the past four years compared with only a 20-50%rise in the other segments. The price-rental mismatch has also proven to be the most staggering. With rentals currently at an all-time high from 2008 peaks, we anticipate slower growth in FY14.
Lingering headwinds. Other challenges include a fragile global macroeconomic outlook and ample supply in the pipeline. Iskandar Malaysia will also pose competition in the medium term, especially for lower value-added industrial activities within Singapore. Empirical evidence suggests that warehouse rents and asset values in Singapore are, respectively, 2.5x and 8.5x higher than in Iskandar Malaysia.
Buffered from downside. A-REIT has committed SGD136.9m to development and asset enhancement works, which are scheduled for completion in 1Q-4Q14. We see these initiatives as DPU growth catalysts and providing price support in the event that industrial property prices start to turn south. We forecast DPU to grow at 4% CAGR in FY3/13-FY3/16. A-REIT has also reduced its revenue due for renewal at the beginning of FY3/13 from 21.4% to 10.5% at end-Sep 2013. It still has 22.4% of lease expiry in FY3/14 and 18.4% in FY3/15, consistent with prior years.
Moving up the value chain. Based on our estimates, A-REIT has 38% of its FY3/14F GAV in business/science parks and 23% in high-tech industrial/data centres. Only 16% remains in the light industrial/flatted factories segment. We expect the first two segments to progressively increase in proportion as Singapore outsources its lower value-add activities to neighbouring countries (warehouse rents and asset values in Singapore are, respectively, 2.5x and 8.5x higher than in Iskandar Malaysia). We see A-REIT’s success closely intertwined with the economic restructuring efforts of Singapore. Reiterate HOLD with a lower TP of SGD2.30.
Publish date: 06/12/13