ALLCO – Nomura
ALLCO – Nomura remains STRONG BUY with target price $1.61
– Allco has innovatively proposed a renounceable rights issue to facilitate the acquisition of a 50% stake in a Canberra office building. The deal lengthens Allco’s average lease term to 12.8 years. With cashflows underpinned, with think the deal is a precursor to more opportunistic deals in Asia. Our STRONG BUY call stands.
– Allco proposes yield-accretive deal, NAV raised to S$1.61 . Allco has proposed to acquire a 50% stake in a Canberra office building for S$136.5mn, with the deal to be funded via a proposed S$210mn renounceable rights issue. The targeted property is being acquired on a cash yield of 6.0%, with the property leased for 18 years to the Australian federal government agency Centrelink (unlisted). The acquisition will increase the weighted average lease term of the Allco portfolio from 5.4 years to 12.8 years. With the portfolio having a secure cashflow, we believe the deal will enable Allco to pursue more opportunistic acquisitions in Asia. We have analysed the deal and rights issue and believe it to be yield accretive by 5.6% in FY07F, 4.0% in FY08F and 3.8% in FY09F.
Note
1) As the deal has yet to be sealed, we have not incorporated it into our official forecasts, though our analysis is presented in Exhibit 1.
2) Our yield-accretion calculation is based on our estimated theoretical ex-rights price of S$1.24/unit (see Exhibit 2).
– Independent of the proposed acquisition and rights issue, we have raised our SOTP NAV (pre rights) to S$1.61/unit (from S$1.53/unit), on the basis of 1) higher valuations for its Singapore property assets, given recent transactions — we now value them at S$1,404/psf (versus S$1,361/psf previously), and higher translated valuations of the group’s interest in Central Park Perth, given the strength of the Australian dollar.
– Allco to acquire 50% stake in Canberra office for S$136.5mn. Allco has agreed to acquire a 50.0% indirect interest in “the Centrelink Property” for A$108.75mn (S$136.5mn). The property has a projected cash yield of 6%. (Note the reported initial yield of 7.7% and assumed income of A$5.2mn for FY07, and 7.4% yield and assumed income of A$10.1mn for FY08, are accounting yields, due to the long lease revenue being recorded on a straight-line basis). According to the Property Council of Australia, as at end 2006, Canberra had an office vacancy of only 1.8%, the lowest in 16 years. While vacancy is low, supply is on the rise, with an expected 260,000sm due for completion in 2007 and 40,000sm over 2008-09. While the supply/demand balance is expected to shift, the Centrelink Property is to be leased by an Australian Federal government entity, Centrelink, for an initial term of 18 years from 4 July, 2007, protecting Allco’s cashflow from near-term market fluctuations. The lease incorporates a 3% annual rental escalation for the initial 18-year term. The office building has been purpose designed for Centrelink. In addition, Centrelink has an option to renew its lease for two additional consecutive terms of five years each. The Centrelink Property has a land area of approximately 575,869sf (53,500sm) and forms part of the Tuggeranong town centre in Greenway, Canberra. It is located in the western section of the Tuggeranong Town Centre, immediately to the south of the Tuggeranong Office Park, approximately 25km south of the Canberra CBD. According to Allco, the Centrelink Property comprises a contemporary designed, five-storey (basement and four upper levels) commercial office building with an NLA of approximately 430,556sf (40,000sm) and 1,093 car parking bays. The property is due for completion in June 2007.
– Renounceable rights issue to raise S$210mn. Allco is proposing a renounceable underwritten rights issue of new units. It expects to raise gross proceeds of up to S$210.0mn. Allco intends to use S$138.6mn to finance the proposed acquisition in Canberra, and the rest to repay existing debt/partly refinance the existing portfolio. We expect FY07F debt to fall from our current forecast of 0.35x to 0.31x, giving opportunities for more leveraged acquisitions. We estimate the deal to be yield accretive, by 5.6% in FY07F, 4.0% in FY08F and 3.8% in FY09F. Note our yield accretion calculation is based on our estimated theoretical ex-rights price of S$1.24/unit, assuming the rights are issued at a 25% discount to the current share price (the manager has indicated a 15-35% discount) (see Exhibit 2).
– Looking to fund more growth; suggests more acquisitions. Within the circular, the manager is proposing to seek a general mandate for issuing of additional new units in 2007, provided that the number of new units does not exceed 50.0% of the number of units in issue as at 31 December, 2006. The general mandate would allow Allco REIT to issue an additional 247.7mn new units. Assuming these units were issued at a 15% discount to the current share price, Allco would be facilitating the raising of about S$280mn. Given the nature of the mandate sought, it suggests Allco is looking to make further acquisitions in the next six months.