AllCo – Phillip

Refinancing Concern Addressed

Allco REIT announced it had received extension on the maturity date of S$550 million of its debt, which was due in July 2008 to 31 Dec 2009. The balance of S$70 million will be repaid with the proceeds from the redemption of AWPF. With the announcement, we believe the clout over refinancing worries has been dispelled and thus will not lead to any force-sale of its properties.

Earlier, Moody’s downgraded Allco’s credit rating for the second time within a span of two months. Allco’s credit rating was downgraded from Baa3 to Ba1 on 31st Jan 2008 and was further downgraded one level to Ba2 on 18 Mar 2008. The latest revision centers on concerns of Allco refinancing progress as well as outcome of the possible divestment undertaken by Allco REIT of its Australian properties.

With regard to the strategic review, the manager of Allco Commercial REIT announced that it is investigating a potential divestment of its Australian properties. The decision stems from the strong Australian property market that has resulted in substantial capital gains as well as to redeploy capital to higher growth assets.

AWPF has stated its intention to dispose of its entire portfolio and Allco REIT expects to receive its proportionate share in AWPF in the 3rd quarter of 2008.

With the latest guidance from Allco, we believe a likely scenario would be Allco manages to refinance at a cost of 4%., while keeping both the Central Park and Centrelink properties and AWPF will be fully redeemed.

Scenario Analysis

We conducted a scenario analysis study of possible outcomes from Allco’s refinancing talk as well as the strategic review on the impact of DPU.

Scenario 1: AWPF fully redeemed, sold off Central Park to realise capital gain. Proceeds from sale used to reduce debt, gearing reduced to 26%.

Scenario 2: Proceeds from AWPF redemption reduces debt marginally to 42%

Valuation and recommendation. The downgrading of Allco’s credit rating has hurt the dividend payout, although fundamentally we believe Allco’s portfolio will continue to do well. Allco is a victim of bad sentiment surrounding the sector that resulted in a tight credit market making refinancing more difficult and most costly. The double credit rating downgrade stems from rating agencies taking a more cautious stance in their methodology after the sub-prime fiasco. Our analysis study indicates that under different assumptions, FY08F DPU ranges from 5.44 cents to 7.35 cents. This translates to a yield range of 7.8%-8.7%. We note the contrast to the 6.73 cents paid out in FY07 and represents a yield erosion of 19.1% in the worst case while a yield accretion of 9.2% in the best case. Fair value estimation ranges from S$1.00 to S$1.14. Our base case valuation is premised on the assumptions that Allco will refinance at 4%, which represents a margin of 200 basis points over SIBOR and Allco will retain the Central Park and Centrelink buildings. Fair value is lowered from S$1.21 to S$1.07. Maintain Buy.