Sabana – Phillip

Global largest listed Shari’ah compliant REIT

Trust profile

Sabana Shari’ah Compliant Industrial Real Estate Investment Trust (Sabana REIT) is a Singapore-based REIT with a mandate to invest in income-producing industrial real estate and real estate-related assets in Singapore and Asia with compliance to Shari’ah investment principles. Sabana REIT is the first fully certified shari’ah-compliant REIT to adopt Gulf Cooperation Council (GCC) Shari’ah Compliant standards, and provide access to Islamic equity markets and diverse investor base.

Investment merits

• Revaluation surplus offers potential upside to net asset value per share (NAVPS) and may act as a re-rating catalyst to share price.

• Freight Link’s expertise in chemical warehouse & logistics give them an edge over its peers.

• Triple net master lease structures provide some form of security as the rental income is locked-in and likely to be stable and visible for the next three years.

• The adoption of GCC standards Shari’ah compliance provides additional access to Islamic equity market that is untapped by Shari’ah compliant REITs listed in Malaysia.

• Ample debt headroom leaves Sabana REIT in good position to take advantage of acquisition growth.

Potential risks

• Renewal of master leases in 2013 may pose a challenge to the management as 60% of the master leases based on the gross revenue will be expired in 2013.

• Listing of more Islamic REITs may compete with Sabana REIT. This may turn on the battle for the flow of funds from the Islamic equity market.

• Uncertainties in global economies could moderate Singapore economic growth. Manufacturing sector may experience a tepid expansion compared to last year.

Valuation

In view of the short land tenure for industrial properties, we ascribe a 9.5% discount rate to Sabana REIT. We initiate coverage on Sabana REIT with a fair value of $1.11, representing a potential upside of ~29% with the inclusion of FY11 dividend yield of 10%. The revaluation of properties this year is expected to increase owing to the buoyant industrial property market. We therefore opine that an increase in book value may act as a re-rating catalyst to the share price. With Sabana REIT set forth to cross $1 billion portfolio by the year end, further upsides are expected in the 2H 2011 to drive up the share price. Future acquisition is not priced into the model.