AllCo – DBS

Unlocking its asset values

Story: Allco REIT has announced that I) Allco Principals Investment Pty Limited (API) has been served a receivership notice. While API does not have a direct stake in Allco REIT, it holds 51% in the REIT manager and has an income support arrangement totaling A$8m till Mar’09.

Separately, Allco REIT also announced a strategic review in of its portfolio, which may result in a divestment in its Australian properties.

Point: In our view, both this events could have a slight dilutive impact on earnings in the near term. The loss of income support agreement is possible given that it is unsecured. Therefore, we have cut our DPU forecasts by 5% in FY08 and FY09 to 6.7cts and 7.0 cts respectively.

In addition, while we view that it could be a good time to divest its Australian property given the toppish office cycle, interest savings from paring down debt is unlikely to offset the vacuum in earnings in the near term. Our sensitivity analysis of a sale of Central Park indicates a base case scenario where we have assumed management to use sales proceeds to repay its existing debt facilities further erodes DPU by another 10%. Management has also indicated that it could look to diversify into Malaysia to boost forward income streams. However, no timeline is indicated.

Relevance: Allco’s share price had fallen by c.10% since the beginning of the year and is currently trading at attractive 8.3% FY08 and 8.7% FY09 yield. Our DCF – backed revised TP of S$1.54 offers 49% upside. Key uncertainty for this stock is the lack of clarity of potential reinvestment plans moving forward, which will lead to a drag in share price in the near term.