AllCo – Phillip

Allco annouced 3 yield accretive acquisitions of an additional three properties in Japan, which will result in an exposure of 43% Singapore properties, 42% Australia properties and 16% Japan properties. The acquisitions are expected to be completed in late September.

About the properties. Allco will acquire the three properties for a total consideration of S$153.05 million, a discount of 1.6% to the appraised value, with a weighted initial yield of 4.68%. The acquisitions will be fully funded by debt which will bring gearing up to 33% post acquisitions. The leases are relatively short-term and management has indicated a possibility of 5-10% rental reversions upward upon renewal of leases.

Valuation and Recommendation. We adjusted our revenue estimates accordingly with the acquisitions. We retained our fair value estimate of $1.68, derived from our DCF model. Key assumptions include a WACC of 6.65, risk premium of 6.7%, beta of 0.9 and a terminal growth rate of 2%. We have a forecasted payout of 5.94 cents for FY07 and 7.42 cents for FY08, which translate to 5.76% and 7.2% yields respectively. The increased exposure in the world’s 2nd largest economy improves the diversification and reduces the reliance on any single market. We maintained our view that Allco is currently attractively priced, offering the highest yield of 5.76% among the office REIT, and is poised to benefit from the rising office rental trend.