A-REIT : CIMB
Overseas expansion by year-end?
FY03/07 results in line. Full-year DPU of 12.8cts is in line with our forecast but 1.5% below consensus estimate. Gross rental revenue was up 25% yoy to S$283m, driven by acquisitions completed during the year (S$340m) and higher overall occupancy rates (97% as at end-FY03/07, up from 95% a year ago).
On course to meet portfolio target. Areit has a portfolio target of S$5bn by 2010 (current S$3.3bn). Some S$148m worth of acquisitions sealed last year are pending completion (build-to-suit projects that are expected to be completed by 1H08). The potential acquisition pipeline includes S$400m-500m from parent Ascendas, S$600m-700m from JTC asset divestments and a development capacity of S$269m.
Strong demand for suburban office space, as more businesses move their noncore operations away from the CBD on account of surging prime office rents. As a result, rental renewal rates at Areits Business and Science Parks and Hi-Tech Industrial properties rose 13% and 19% respectively during the year. About 74% of Business and Science Parks leases and 65% of Hi-Tech Industrial leases are short term and imply the potential for robust rental reversions going forward.
Decision on regional expansion by year-end. Besides outright acquisitions of overseas assets, Areit could participate in parent Ascendas investments in the region by taking stakes in funds that Ascendas has set up in these countries.
FY10 DPU introduced at 14.6cts, based on a portfolio size of S$4.8bn by end-FY10 (average growth of S$500m a year) and an assumed average cap rate of 7% for potential acquisitions. In addition, our FY08-09 DPU forecasts have been raised by 3.2% and 1.6% respectively after tweaking margin assumptions for the different property segments.
DDM-based target price lifted to S$2.90 from S$2.82, on account of our revised DPU forecasts (cost of equity 6.2%). Our new target price implies an FY08 yield of 4.9% (spread of 200bp over the 10-year government bond), which we believe is reasonable. While the size of Areit makes acquisition-led growth incrementally difficult, above-average projected yields of 6% for the next three years make Areit a good defensive stock. We anticipate newsflow on Areits overseas expansion over the next 12 months to provide catalysts for the stock. Maintain Outperform.