AllCo – DBS

Acquisition driven performance

Comment on Results

Allco’s results were within expectation. Gross revenue and net property income growing 76.4% and 62.3% y-o-y, respectively, to S$28.4m and S$22.1m led by contributions from new acquisitions such as the 3 Japanese properties and Keypoint, completed in 2H07. Contributions from these assets made up c80% of revenue and NPI.

However, DPU was flat y-o-y at 1.6cts due to i) dilutive impact from a higher unit base following its equity raising in July 2007, ii) increased interest expense from larger borrowings and higher interest cost (+141% to S$9m in 1Q08), and (iii) reversal of allowance of impairment of receivables from API of S$2.0m.

Moving forward, we expect bottomline growth to be fueled be organic drivers coming from positive office rental reversions and planned AEI at Keypoint. An estimated 45% of its portfolio NLA is up for renewal over FY08-09F. In addition, parent, Allco Finance Group (AFG) had recently indicated it will guarantee the payment of outstanding receivables and obligations amounting to A$7.98m (S$9m). This has not been factored into our current forecast and could raise our earnings projections by c.5%.

In terms of acquisition growth, we believe this strategy would materialize only when Allco further de-gears it balance sheet. Current gearing is at 45%. Meanwhile management’s strategic review to divest its Australian properties, are still ongoing and proceeds from these activities could potentially be utilized to strengthen its balance sheet.

Recommendation

Maintain FY08 and FY09 DPU estimates of 6.6cts and 6.7cts, translating to FY08-FY09F yields of c8%. Our price target of $1.23 offers potential 45% upside. However, we believe the share price is likely to be re-rated only when it demonstrates successful execution of its growth strategies and provide better clarity on Allco REIT’s position following API and AFG’s restructuring activities.