Allco – DBS
A China Square Central Hotel ?
Allco REIT (Allco) announced that URA has granted a Provisional Permission in respect of the proposed Alterations and Additions (A&A) to their China Square Central (CSC) asset which will include an additional 16,000 sqm (170,000 sq ft) of GFA to the property.
Allco’s plans will include the following:
i) An additional 10-story hotel tower with approximately 350 rooms (on the additional GFA allocated)
ii) conversion of existing car parks into office space
iii) refurbishment of the existing retail space
iv) payment of a differential premium where applicable.
The development is limited to c.S$203m based on 10% of the value of Allco’s total deposited property as at 31 Dec’07.
Investors have expected an announcement on the redevelopment of CSC. However, it is too early in the process to quantify the potential impact from such a development, this plan, in our view, is inclined towards Neutral – Negative, assuming a potential increase in funding and the following considerations:
1) Strategic direction of the REIT ? Allco is essentially listed as a commercial REIT. Moving forward, the change in portfolio mix, could indicate a change in key strategic direction of the REIT.
2) Change in perceived risk profile for the REIT. The proposed hotel component (which is c.10% of total GFA), could introduce earnings volatility given the more cyclical hotel earnings business.
3) Potential dilution to earnings and distribution income in near term. Potential loss of rental income and rental rebates to current tenants during redevelopment could impact earnings. Potential interest payments capitalized during development would also affect distribution income. Assuming the project is fully debt funded, we estimate that higher interest costs could reduce DPU by c.20% from FY09 till the completion of the hotel.
4) Impact on Gearing. As at 31 Mar ’08, Allco’s gearing at 44.8%, assuming a S$203m development cost , would rise to c.50%, relatively high compared against its S-REIT peers.
As the decision to proceed is still pending Allco getting the required mandate and assessing the financial viability of this project. As such it will be too premature to assume any financial impact given that plans are still tentative. As such, we are maintaining, our earnings forecast for FY08 -FY09 and look forward to further data points and newsflow from Allco with regards to plans on CSC.
Hence, we maintain our recommendation and target price of $1.23. Based on its last closing price of $0.76, Allco is trading at an attractive 0.5x P/BV and a FY08- 09 DPU yield of 8.4-8.5%. For exposure to office sector, we prefer CCT (TP $2.93) and Suntec ( TP $1.98) given a more attractive DPU FY07-09 DPU growth in excess of c.20% and c.9% respectively.