AllCo – DBS

Strong 2Q 08 earnings

Story: 2Q08 results were within expectation. Gross revenue grew 57.9% y-o-y to S$27.6m, while NPI grew 37.6% to S$20.9m. Distributable income grew 61.4% to S$17.2m, translating into 2.4cts DPU in 2Q08. For 1H08, unitholders are getting 3.99 cts DPU. Allco also recorded a write-down for its investment properties, mainly from Cosmo and Centerlink, of S$29.7m, resulting in NAV falling to S$1.39 per share on 30 Jun 2008 (1Q08: S$1.45).

Point: The better 2Q08 performance was driven by higher rents achieved at Central Park and contributions from properties purchased after 2H07, i.e. Centerlink, the Japanese assets and Keypoint. Moving forward, there are several issues to look at: (i) expiry of S$70m loan in Nov08 that is expected to be repaid from proceeds from the divestment of AWPF, and (ii) strategic review of its Australian assets. Proceeds will be used to pare down existing facilities and for capital re-cycling for asset acquisitions lined up by Frasers Centrepoint Ltd (FCL). In this respect, we remain optimistic about opportunities in the medium term with its new parentage. Allco should benefit given FCL’s established presence in Asia Pacific and a ready pipeline of assets worth S$700m.

Relevance: We have adjusted FY08F and FY09F DPU to 6.9 and 7.0cts, respectively. Our DCF-backed target price is reduced to S$0.93 after imputing higher risk free rate of 3.9%, beta of 0.8 and a lower terminal growth rate of 0.5%. The share price could underperform in the near term, given the uncertainty in terms of the structure and direction of the REIT following the change in parentage. But valuation wise, Allco is trading at attractive 0.6x P/BV and offers FY08-FY09F DPU yields of 8.9% – 9.0%.

Maintain Buy