A-REIT – JPM

Lack of catalyst – downgrade to Neutral

• We downgrade AREIT to Neutral, with a Dec-2010 DDM based price target of S$2.05/share unchanged. The stock is currently trading at 6% premium to our current NPV and 1.3x historical book, a level that is at the historical average, and has largely priced in the recovery of the industrial sector. With the expected lack of catalyst in the next 6-12 months and hence limited upside to our numbers, we see the stock to be range bound for now and offering total return of 6% this year.

• Carrying heavier equity load. In Aug 09, A-REIT raised over S$300 million equity to fund its future growth. While management has been actively looking for potential acquisitions and built-to-suit projects, the rapidly moving market has made it difficult for the deals to be closed. Given the still uncertain outlook and volatile market, we see high risk of A-REIT carrying this heavier equity load for a prolonged period.

• Strategic shift the long-term catalyst? With the portfolio size standing at S$4.5bn today, single acquisition of industrial property is unlikely to provide much accretion. As A-REIT continues to grow in size, portfolio acquisitions and potential M&A opportunities would, in our view, increasingly become an issue of focus. In addition, a change in investment mandate could also allow A-REIT to take more advantage of sponsor Ascendas’ wide presence in the region.

• Key upside risks to our Neutral rating include a faster than expected deployment of the access capital and a reversal of investors’ risk appetite which puts greater emphasis on low risk stable return. Key downside risks include worse than expected operating fundamentals.