A-REIT – DBS

Fairly priced

• Resilient set of 2Q10 results
• Acquisitions likely further re-catalysts
• Downgrade to HOLD, TP S$1.90.

Resilient set of 2Q10 results. 2Q10 performance was in line with our projections. While gross revenues and net property income of improved to S$102.3m (+5% yoy) and S$81.1m (+12% yoy), performance remained flat on quarter. Distributable income came in at S$61m (15% yoy), translating to a DPU of 3.48 Scts. (Note: As AREIT have already paid 1.94 Scts/unit on 23rd Sept’09, unitholders will be getting 1.54 Scts adjusted for new placement units).

Financial metrics remained strong. Gearing remained low at c30%, which is estimated to increase to c 32% post completion of its Singtel Build to Suit (BTS) project. NAV stands at 1.60.

Certain level of portfolio growth has been priced in. Management guided that they are currently evaluating certain BTS opportunities. While A-REIT has the capacity to acquire and grow, given that it is currently trading at 1.2x P/BV, we believe that a certain level of this growth has been priced in. We have assumed S$120m worth of new properties in our forecasts.

Adjusting FY10-11F estimates upwards, TP to S$1.90 but downgrade to HOLD. We adjust our FY10 numbers slightly upwards to take into account (i) slightly higher net property income margin assumptions,(ii) earlier contribution from completion of its BTS in our numbers. This results in a 2-3% adjustment in our FY10 –11 DPU assumptions and target price. Downgrade to HOLD, given limited upside to our price target of S$1.90.