AllCo – DBS

Well positioned here and Down Under

FY06 distribution slightly below expections. Allco has reported FY06 results slightly below expectations, delivering DPU of 1.52 cents for 4Q06 and 4.58 cents for the full year which is 5.3% above the REIT manager’s forecast. This translates to annualised distribution yield of 4.8% for FY06. Rental revenue grew 40% y-oy, mainly attributed to higher contributions from Central Park (Perth). Allco also reported higher assessment of revaluation of its asset portfolio which brings about accretion to asset values by S$125.3m or rise of 17.9% to S$823.6m which raised NAV per unit to S$1.17. The increase in portfolio asset value is mainly contributed by revaluation of Central Park by 32.5%, with the rest of the Singapore properties bringing about increase in value averaging 10.6%.

Upward revaluation reflects strength of physical market. The upward valuation of its assets come as no surprise as rental growth provides the lead-up to rise in capital values. This is exemplified by the Perth asset – the long lease secured with Hamersley Iron increased in rentals by 20% to A$360 psm, topped with stepped rental increments. We would expect the strength of the office market to lead to continual trend of rising capital values, thereby increasing Allco’s debt capacity and is well-positioned for acquisitions moving forward.

Asset enhancement delayed. We previously expected retail asset enhancement for China Square Central to commence this year. However, we understand the time line for the enhancement is delayed, with possibly more updates by 3Q07. To recap, China Square Central is under a master lease expiring in 2012 with yearly income support of S$17.55m with Allco attributing 40% of any upside in excess of the rental support. Despite the delay for the asset enhancement, we expect office rental reversions to be strong with 70% expiring in FY07 and FY08 and NPI to exceed the income support by FY08. Leasing activities for maiden acquisition 55 Market Street is on-going and currently about 50% committed.

Maintain Buy, TP upgraded to S$ 1.45 on higher expectations of office rental growth. We continue to be positive on Allco’s rental growth prospects, with assets well leveraged to strong fundamentals in the Singapore and Australian office markets. With 70% of China Square Central’s office leases up for renewal in the next two years, Allco is poised to benefit from the rising Singapore office market. We are maintaining our Buy recommendation for Allco with raised target price of S$ 1.45 after raising our office rental assumptions.