AllCo – Phillip

Amidst news of recent aggressive buying sprees in the core CBD area, Allco took the alternative approach by making an acquisition in the CBD fringe area. Allco annouced the acquisition of Keypoint, located at the junction of Beach Road and Jalan Sultan, for a total consideration of $370 million, which is at a discount of 1.18% to the appraised value of $374.4 million.

About the property. Keypoint is an integrated 25-storey commercial building with a total NLA of 311,892 sq ft. The building comprises a three storey podium and a 22-storey office tower. Office space represents 89.4% of the NLA while retail space occupies 10.6%. Allco will acquire the property for a total consideration of $370 million, a discount of 1.18% to the appraised value of $374.4 million, at an initial yield of 4.65%. In addition, the acquisition has an income support deed of up to $10.5 million over a period of two years. The acquisition will be fully funded by debt which will bring gearing up to 46%, slightly past the target range of 40%-45%. The leases have a WALE of 1.05 years contracted at an average of $3.28 psf versus the current asking rate of $6.00 psf.

Valuation and Recommendation. With our revised estimates, we have a forecasted payout of 5.42 cents for FY07 and 7.63 cents for FY08, which translate to 5.0% and 7.1% yields respectively. We retain our fair value estimate of $1.68, pending a review after the 3rd quarter results annoucement later in the month. We view the acquisition favourably, mainly due to the a) spillover demand from the core CBD area, and b) expiring leases that allow Allco to capture positive rental reversions at an opportune time when rentals are on an uptrend. We reiterate our view that Allco’s valuation remains attractive given that it is currently trading at a 22% discount to its book value. We feel that Allco has not caught up to the broad market upswing recently and this presents an entry opportunity.