A-REIT – CIMB
Positives in the price
• Downgrade to Underperform from Neutral. We downgrade AREIT to Underperform as we believe positives from its resilient occupancy and management premium have been priced in. Although 2QFY10 results beat our expectations and we have raised our DPU forecasts, we believe its hefty P/BV premium to the sector reflects all its positives.
• Results above expectations. 2QFY10 results exceeded Street and our expectations due to lower-than expected expenses and higher-than-expected rental reversions. 2HFY10 DPU of 7.1cts forms 56% of our full-year forecast. DPU for the second quarter (3.48cts) shrank 13.3% yoy due to new units issued in its public and private equity issuance in Aug 09. Net property income of S$81.1m was up 11.7% yoy on continued strong rental reversions, the addition of two properties, significantly lower utility expenses and property tax rebates.
• Occupancy down moderately; reversions still positive. AREIT’s portfolio occupancy slipped 1.2% pts yoy to 96.8% as at end-Sep 09. This was primarily due to lower occupancy in multi-tenanted buildings, down 2.3% pts to 93.3%. However, the qoq decline was much smaller at 0.7% pt, indicating a bottoming out. The manager managed to renew the rents of existing tenants for all sectors except Light Industrial at 3-23% above previously contracted rates. New take-up, however, dropped 6-9% yoy for all sectors except Logistics/Distribution Centres.
• Changes to assumptions. We increase our assumption for net property income margins from 75% to 79% following guidance that expenses would stay consistent. We are also assuming a smaller occupancy decline going forward, and raise our rental growth assumption to 2% (from 1%) as existing rental rates remain below market rates. Separately, we factor in contributions from the SingTel build-to-suit project which is due for completion by March next year. Our DPU estimates increase by 2-16% for FY10-12. Our DDM-derived target price (discount rate 8.4%) rises accordingly to S$2.02 from S$1.74. Despite our higher target price, we believe AREIT’s premium P/BV of 1.2x over the sector average of 0.8x reflects all the positives. A recovery in occupancy and rents typically lags that of industrial indicators.