Allco – Nomura
ALLCO REITS, nomura remains STRONG BUY with target price $1.73 (from $1.61)
– Since listing, Allco, via lease negotiations (in both Singapore and Perth) and acquisitions, has lengthened the average lease term to 12.8 years and introduced annual rental increases. With cashflows underpinned, we think Allco is set to pursue further opportunistic acquisitions. We retain our STRONG BUY call. – Allco NAV raised, stronger balance sheet. We raise our NAV-based fair value estimate to S$1.73/unit (pre-rights issue), on a brighter outlook for the Perth and Singapore office markets. We expect a more positive outlook for office rents to flow through to higher asset valuations. The lift in revaluation reserves, combined with the current rights issue, as well as approval at the recent EGM for a general mandate to issue new units (on our numbers, an additional 248mn, raising circa S$280mn), will further de-leverage the balance sheet providing scope for Allco to execute its acquisitive strategy in Asia. To reflect more optimistic rental growth expectations, we raise FY08F and FY09F earnings by 5.6% and 8.8%, respectively. – Perth office market — squeeze continues . The Perth office market continues to be characterised by strong demand and a severe shortage of supply. Indeed, vacancy at end-2006 fell to 0.9%, from 3.5% in June 2006. CBRE is suggesting that Perth CBD vacancy will remain below 1% over the next two years due to the lack of supply — no significant supply is scheduled for completion until 2009F. Respite should emerge in 2009F, however, with 200,000sm scheduled for completion over 2009-11F. With limited space options available for – tenants and the prospect of higher supply in two-three years, landlords Grade A face rents in 2006, according to CBRE, rose by 28% y-y, with rentals in 1Q07 rising by an estimated 6.4% q-q. Premium Grade A (face) rents are currently A$500/psm pa, while Grade A rents are A$420/psm. CBRE expects rents to rise by 16-25% in 2007. We raise our rental growth forecasts for Central Park Perth to 17.5% in 2007F (from 15.0%) and 12.5% in 2008F (from 8.5%). These forecasts may prove conservative in light of the supply shortage. Over the past year, prime office yields compressed 50-75bps, with office yields at end-1Q07 at 5.75-6.75%, versus 6.50-7.25% in 1Q06. – Upgrade office rental outlook: +30.5%, 2007F; +15.8%, 2008F. We upgrade our outlook for the office market following a significant drop in vacancy in 2006, and strong rental growth in 1Q07. Office vacancy in the Raffles Place precinct has fallen to 3.2% as at 1Q07 (most recent figure from real estate consultancy JLL) from 3.6% in 4Q06 and 8.6% in 4Q05. According to JLL, Grade A rents in the Raffles precinct have increased by 22.9% q-q to S$11.80psf; CBRE suggests they have increased by 21.4% q-q to S$10.60psf. We expect rentals to peak in 2009. Our higher market rental numbers feed through to higher asset valuations. We now value China Square at S$1,489psf (previous: S$1,375psf) and 55 Market Street at S$1,607psf (previous: S$1,549psf). These valuations appear reasonable in the context of recent en-bloc transactions. Note that Temasek Tower was sold for S$1.04bn (S$1,550psf); Singapore Exchange’s interest in SGX Centre was sold for S$271mn (S$1,599psf); 1 Finlayson Green was sold for S$231mn, equal to S$2,470-2,650psf. (The current existing net lettable area of 86,500sf, though, could be increased to 93,500sf if leased to a single tenant.)
– Since listing, Allco, via lease negotiations (in both Singapore and Perth) and acquisitions, has lengthened the average lease term to 12.8 years and introduced annual rental increases. With cashflows underpinned, we think Allco is set to pursue further opportunistic acquisitions. We retain our STRONG BUY call. – Allco NAV raised, stronger balance sheet. We raise our NAV-based fair value estimate to S$1.73/unit (pre-rights issue), on a brighter outlook for the Perth and Singapore office markets. We expect a more positive outlook for office rents to flow through to higher asset valuations. The lift in revaluation reserves, combined with the current rights issue, as well as approval at the recent EGM for a general mandate to issue new units (on our numbers, an additional 248mn, raising circa S$280mn), will further de-leverage the balance sheet providing scope for Allco to execute its acquisitive strategy in Asia. To reflect more optimistic rental growth expectations, we raise FY08F and FY09F earnings by 5.6% and 8.8%, respectively. – Perth office market — squeeze continues . The Perth office market continues to be characterised by strong demand and a severe shortage of supply. Indeed, vacancy at end-2006 fell to 0.9%, from 3.5% in June 2006. CBRE is suggesting that Perth CBD vacancy will remain below 1% over the next two years due to the lack of supply — no significant supply is scheduled for completion until 2009F. Respite should emerge in 2009F, however, with 200,000sm scheduled for completion over 2009-11F. With limited space options available for – tenants and the prospect of higher supply in two-three years, landlords Grade A face rents in 2006, according to CBRE, rose by 28% y-y, with rentals in 1Q07 rising by an estimated 6.4% q-q. Premium Grade A (face) rents are currently A$500/psm pa, while Grade A rents are A$420/psm. CBRE expects rents to rise by 16-25% in 2007. We raise our rental growth forecasts for Central Park Perth to 17.5% in 2007F (from 15.0%) and 12.5% in 2008F (from 8.5%). These forecasts may prove conservative in light of the supply shortage. Over the past year, prime office yields compressed 50-75bps, with office yields at end-1Q07 at 5.75-6.75%, versus 6.50-7.25% in 1Q06. – Upgrade office rental outlook: +30.5%, 2007F; +15.8%, 2008F. We upgrade our outlook for the office market following a significant drop in vacancy in 2006, and strong rental growth in 1Q07. Office vacancy in the Raffles Place precinct has fallen to 3.2% as at 1Q07 (most recent figure from real estate consultancy JLL) from 3.6% in 4Q06 and 8.6% in 4Q05. According to JLL, Grade A rents in the Raffles precinct have increased by 22.9% q-q to S$11.80psf; CBRE suggests they have increased by 21.4% q-q to S$10.60psf. We expect rentals to peak in 2009. Our higher market rental numbers feed through to higher asset valuations. We now value China Square at S$1,489psf (previous: S$1,375psf) and 55 Market Street at S$1,607psf (previous: S$1,549psf). These valuations appear reasonable in the context of recent en-bloc transactions. Note that Temasek Tower was sold for S$1.04bn (S$1,550psf); Singapore Exchange’s interest in SGX Centre was sold for S$271mn (S$1,599psf); 1 Finlayson Green was sold for S$231mn, equal to S$2,470-2,650psf. (The current existing net lettable area of 86,500sf, though, could be increased to 93,500sf if leased to a single tenant.)