AREIT – CIMB

No surprises

• FY08 results in line. Gross revenue was S$322.3m in FY08, up 13.9% yoy. Although this was marginally below our expectation (94.3% of full-year forecast), lower-than-expected interest rates brought FY08 distributable income to S$187.3m and DPU to 14.1cts, in line with consensus (13.9cts) and our estimates (13.8cts).

• Warehouse retail segment yielded 9.1%. Warehouse retail posted the strongest yoy growth in net property income, up 343% to S$11.1m. This was led by full contributions from the Courts and Giant buildings which had been completed at the end of FY07 and early FY08. At development costs of about S$121m, net yields from this segment were 9%, above average acquisition yields of 6-7%. The other segments also posted strong yoy growth of 6-15%.

• Short-term borrowings to drop from 15% to 2%. As at 31 Mar 08, A-REIT’s short term debt of S$238m was 15% of its total borrowings of S$1.6bn. Management addressed concerns over its growing short-term liabilities with the assurance that a 3-year term loan facility for S$200m would be finalised in about two weeks. This would lower its short-term debt to S$38m, or 2% of its total debt. About 72% of its interest exposure is fixed at a weighted average cost of 3.1%.

• Possible overseas acquisition in two years. Management indicated that it may acquire overseas properties in about two years, after its S$309m of development projects are closer to completion. Targets are likely to be in neighbouring countries such as Vietnam and Malaysia. Acquisitions from Ascendas’s ASEAN Business Space Fund are also possible (see earlier note dated 14 Mar 08).

• Maintain Outperform with higher target price of S$3.07 (from S$2.99). We adjust for a higher rental base for the warehouse retail segment, increasing our FY09 DPU forecast to 15.3cts (+2.9%) and FY10 forecast to 16.4cts (+0.3%). Our DDM-derived target price (discount 6.7%) increases correspondingly from S$2.99 to S$3.07. Maintain Outperform.