AllCo – DBS

The change of the Tide…. F&N Buys into Allco


Story: Allco REIT and F&N separately have announced that Allco Finance Group Limited (AFGL) and two of its indirect wholly-owned subsidiaries, Allco Singapore Holdings Limited (ASHL) and Allco Singapore Investments Pte. Ltd. (ASIPL) have entered into a S&P Agreement with Frasers Centrepoint Limited (FCL) for the sale of:

i) Allco Finance’s Group 17.7% interest in Allco REIT (125.6m shares at the consideration of $0.83), amounting to S$104.3m; and,

ii) the issued ordinary and preference shares in Allco Singapore ( S$75m), the REIT manager of Allco REIT.

Completion of sale on 6th August ’08

The sale is expected to be completed on 6th Aug 08 and is subject to the following conditions being fulfilled:

(a) the Monetary Authority of Singapore not raising an objection to FCL acquiring Allco Singapore;

(b) receipt of Australian Foreign Investment Review Board’s approval for (or no-objection to) the Sale;

(c) waiver of certain covenants under Allco REIT’s financial indebtedness to Commonwealth Bank of Australia;

(d) no breach of certain representations, warranties and undertakings given by Allco Group under the Agreement; and

(e) no occurrence of certain events which have a material adverse effect on Allco REIT or Allco Singapore and their respective subsidiaries.
(From announcement)

Income support arrangements with API ceased

The liability of Allco Finance Group Limited to make payments under the Income support arrangements for the Central Park Asset, Perth will terminate and be restricted to what can be recovered in the administration of Allco Principals Investments Pty Limited (Receiver and Manager appointed), which is in the range of A$1m.

Overall, we think the deal looks to be a win-win situation for both parties. We highlight our views from both Allco REIT and F&N’s perspective in the 2 segments separately.

We maintain our Buy recommendation at TP S$1.23,representing 73% upside.

A) Allco REIT

Point: Deal Neutral to Slightly Positive In terms of valuation, the price of $0.83 per unit that FCL is getting Allco REIT translates to a c. 40% discount to its current book NAV (adjusted for write down in property values of Centrelink in Canberra and Cosmo Plaza in Osaka) at about S$1.40; and, ii) a 17% premiun to the last closing price of $0.71 as at 07/07/08.

From Allco shareholders’ point of view, this announcement is neutral to slightly positive given that:

i) this transaction provides visibility to the strategic direction of the REIT post sale by removing the uncertainty of the REIT’s positioning within the Allco Group in view of the latter’s restructuring activities. The deal also provides backing by a globally recognised conglomerate;

ii) prospect of further acquisition growth given that F&N has a ready pipeline of assets worth c$700m that could be injected into the REIT as well as the possibility of leveraging on FCL’s existing business networks and established relationships in the Asia Pacific region;

iii) The REIT manager is bought out, the poison pill of cS$20m payable is not effected.

iv) However, with FCL’s pipelined assets, the REIT will have exposure to different market segments such as office and high-tech business parks space. Hence, any valuation premium that it could enjoy as a “pure play” REIT could be capped.

Relevance: No change to our TP and recommendation. The REIT is currently trading at an attractive c.9.0% FY08-FY09 DPU yield and at 0.6x P/BV. We remain optimistic on the opportunities available for the REIT post the sale with the entry of a globally recognised conglomerate. .