A-REIT – DMG

Lacking catalysts

Raising our target price to S$2.05 from S$1.72. Our DDM-backed target price reflects a lower cost-of-equity assumption of 8.2% (8.7% previously). We reduced our risk free rate assumption by 50bps due to continued low interest rates. A-REIT will be reporting 2QFY10 results on 19 Oct and we expect annualised DPU of 13.26¢, a 12.2% decline over FY09. The decline in DPU is attributed to the larger share base following its share placement exercise earlier this year. Maintain NEUTRAL. Recommend entry at S$1.80.

Occupancy expected to remain at healthy levels. Reflecting the stabilisation in global demand, occupancy rate for A-REIT’s multi-tenanted properties is expected to remain at 94%, unchanged over the preceding quarter. We expect overall portfolio occupancy to remain at 97% owing to the contribution from single tenanted buildings with long term leases. Through our channel checks, we have not heard of any recent tenancy defaults. Systemic hi-tech rents have been declining in tandem with office rents. However, as A-REIT’s hitech/ business park properties are still 20-30% below market spot rates, we expect rental reversion to remain positive.

Focus on built-to-suit and other acquisition opportunities. Following its S$296m equity fund raising exercise, A-REIT has a sturdier balance sheet with a gearing of 29.3%. With a gearing of below 30%, we believe there is little need for management to further recapitalise its balance sheet, easing concerns that our forecast dividend yield would be diluted. A-REIT has indicated that about S$120m of its recent proceeds could be used partly or wholly fund potential acquisition and/or built-to-suit development opportunities.

Still trading above heyday yields of 6%. At current prices, A-REIT offers investors a stable dividend yield of 7% for FY10 and FY11 – with dividends well supported by the long-term leases on single-tenanted buildings which accounts for 50% of revenue. Between 2005 and 2007, A-REIT traded at 6% forward yield. Our TP of S$2.05 offers a yield of 6.5%, a reasonable peg in our view. We recommend buy on dips as stock has rallied 80% since Mar 09.