a-iTrust – Goldman Sachs

Source of opportunity

We initiate coverage of A-iTrust with a 12-month sum-of-the-parts/DCFbased target price of S$1.66 and a Neutral rating. We like A-iTrust’s development potential, enhanced by a 20% development limit (10% for SREITs), but see the Singapore Industrial REITs offering a better risk/reward for industrial REITs. For example, Pan-Asian logistics REIT Mapletree is trading at a 240 bp yield over A-iTrust, and also operates in a sector where we see abundant acquisition opportunities.

A-iTrust is Singapore’s first listed Indian property business trust, offering exposure to the fast-growing IT services sector in India. Spun off from parent Ascendas, we believe A-iTrust will enjoy stable organic growth from seed investments in four business parks over the next five years, and has a built-in development pipeline of about 4.2 mn sq. ft. of SBA (super built-up area), potentially doubling its current portfolio of 4.7mn sq. ft. We think A-iTrust’s investment platform also offers good acquisition growth potential. We see acquisitions for A-iTrust fueled by its right of first refusal (ROFR) over income producing assets from parent Ascendas and the Ascendas India Development Trust, a private fund with committed capital of S$500mn (target of S$1bn in investment value).

Catalyst

A-iTrust operates in the world’s largest center for IT and ITES outsourcing with a 55%–60% global market share. With the Indian IT services sector expected to reach US$60bn in exports and US$13– US$15bn in domestic revenues by 2010 (projected FY2000-10E CAGR of 29%), prospects for rental growth in business parks space appear to be good. We expect near-term share price performance to be driven by strong pre-commitments on two recently completed buildings, namely Crest, the second building at International Tech Park Chennai (ITPC) and Vega, the fifth building at the V. In the longer term, we see the unveiling of plans for development of its 2.7mn sq. ft. special economic zone (SEZ) pipeline as a further catalyst.

Valuation

We derive our 12-month target price of S$1.66 using a DCF base-case per share value of S$1.06 and land bank NAV per share of S$0.60 (land bank = 2.7mn sq. ft.). By geography, we estimate that 45% of 08E NPI will come from Bangalore, 40% from Hyderabad and 15% from Chennai. We see its conservative capital structure — 4.1% at its listing in Aug 07 — increasing to 22% post the planned development projects in International Tech Park Bangalore (ITPB) and ITPC by FY09, implying debt capacity of S$220mn (35% regulatory debt/asset limit). A-iTrust is trading at yields of 4.2% FY0E8 and 4.9% FY09E, underpinned by a solid 3-yr DPU CAGR we project at 12.9%. We like A-iTrust’s unique growth model and Ascendas parentage, but believe much of its potential is already priced in the shares.

Key risks

Regulatory risks and a slowdown in the Indian IT services sectors could result in rental pressures.