A-REIT – DMG
Resilient earnings
2QFY10 results above expectations. A-REIT reported a 13.2% YoY fall (-3.9% QoQ) in 2Q10 DPU to 3.48¢. Annualised DPU came in at 14.1¢, 6% above our FY10 forecast of 13.3¢ (9.3% above the Street’s 12.9¢ estimates). Net property income was up 11.7% due to positive rental reversion and contributions from new acquired properties and development projects. A-REIT will trade ex-2Q10 distribution on 27 Oct 2009. Our TP of S$2.05 offers a yield of 6.5%, a reasonable peg in our view. Maintain NEUTRAL.
Occupancy fell marginally; tenancy default risk low. Reflecting the stabilisation in global demand, A-REIT’s portfolio occupancy declined marginally to 96.8% from 97.1% in 2Q09. For its multi-tenanted properties, occupancy moderated to 93.3% from 94%. According to management, A-REIT has about 12,098 sqm of its 2m sqm of NLA (0.4% of gross monthly rental income) which could run the risk of default. Default risk from this tenant is almost negligible considering that A-REIT has about 12-month security deposits from the tenant. As of Sep 2009, outstanding accounts receivable past due for more than two months is about S$0.4m or 0.1% of gross revenue.
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 about 30%. At the current gearing level, 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.
Stock almost fully valued; await better entry level. At current prices, A-REIT offers investors a stable dividend yield of 6.8% 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. We recommend buy on dips as stock has rallied 80% since Mar 09. Recommend entry at S$1.85.