K-REIT – SGX
Continued Positive Growth in Net Profit and Distributable Income
- Net Profit increases to $11.8 million for the first nine months of 2007, outperforming the same period last year by 46.6%
- Higher rental income pushes up Distributable income by 34.8% to $14.9 million for the nine month period to September 2007.
- Distribution Per Unit (DPU) amounts to 6.14 cents for the year to date 2007, which works out to annualised DPU of 8.21 cents.
- Portfolio’s committed occupancy remains strong at 99.6% as of 30 September 2007.
Consistent Improvement in Performance
K-REIT Asia Management Ltd, the manager of K-REIT Asia, is pleased to announce that K-REIT Asia achieved a distributable income of $14.9 million for the period from 1 January to 30 September 2007, up 34.8% from the same period in 2006. Backed by higher occupancy and rental rates, rental income was higher at $28.3 million. This in turn pushed up property income by 17.7% year-on-year to reach $29 million.
DPU continued to improve with the rise in net property income and distributable income. DPU
increased by 4.2% from 2.14 cents in 2Q2007 to 2.23 cents in 3Q2007. For the first nine months of 2007, DPU amounted to 6.14 cents and 8.21 cents on an annualised basis.
Execution of Growth Strategy with Maiden Acquisition
K-REIT Asia has proposed to acquire a one-third interest in One Raffles Quay (ORQ) from Keppel Land for $941.5 million. The strategic acquisition will more than double K-REIT Asia’s portfolio size to $1.76 billion and will further strengthen its position as a premier office-focused commercial REIT in Singapore. In addition, yield accretion from the acquisition of the ORQ stake will benefit unitholders with a higher distribution payout. The acquisition is subject to the approval of shareholders of Keppel Land and unitholders of K-REIT Asia at their respective Extraordinary General Meetings to be held on 11 October 2007.
The manager will continue to actively seek acquisitions of prime commercial properties in Singapore and other Asian growth cities to further grow K-REIT Asia’s portfolio size to a targeted $2 billion. KREIT Asia will also identify possible asset enhancement initiatives to add value and achieve better returns for its existing properties.
Rosy Office Market Outlook Suggests Further Rental Growth
The Singapore economy continues to expand at a steadily pace and the Singapore government has earlier revised upward its GDP growth forecast for 2007 to 7 – 8% from 5 – 7% previously. Economic growth is now more broad-based, driven particularly by the construction, manufacturing and financial services sectors.
Demand for prime office space is expected to remain strong with continued economic growth, sound business prospects and further expansion of the financial services sector. As such, prime office rents are expected to increase further, especially when new office supply in the central business district (CBD) remains scarce over the next two to three years. With demand surpasses supply, prime office rents edged up further to $12.60 psf in 3Q2007 from $10.80 psf in 2Q2007 and $6.90 psf a year ago.
The buoyant prime office market will continue to augur well for K-REIT Asia, given its portfolio of quality office buildings in the CBD and the new downturn at Marina Bay following the acquisition of the one-third stake in ORQ. With about 70% of the portfolio’s net lettable area due for renewal between 2008 and 2010, K-REIT Asia is in a good position to ride on the rising rental market, underpinned by strong underlying demand and tight supply.
Source : SGX
Shipping Trusts – DB
Laggards with yield and growth
Buy FSLT and Rickmers
FSLT and Rickmers have lagged the STI by 17% and 14%, respectively, over the last three months. In FY08, we expect FSLT’s yield of 12% to be the highest among Asian stocks that DB covers. Rickmers’ 8% yield is not far behind. Further, we expect acquisitions to see DPU growth of 22% for FSLT and 10% for Rickmers during FY07-09. We prefer FSLT because of its superior yield and forecasted DPU growth.
Steady cash flow from acquisitions; Second hand vessel prices may surprise.
Cash flows are backed by LT contracts with the earliest expiry in seven years time and not affected by rate volatility. Experience in the US indicates that yield compression will happen as dividend accretive investments are made. There is also an under-appreciated possibility that second hand vessel prices may actually go up in situations of tight demand and limited supply, enhancing book value. We estimate that FSLT’s book value is 10% understated because of the rise in bulk vessel prices.
Under-researched laggards; Management keen to see share price perform.
We think there is great room for the laggard performance to turn around over the coming 12 months, especially since this sub-sector still appears to be underresearched, with only three brokers covering FSLT and Rickmers. In our view, managements of both FSLT and Rickmers seem committed to seeing the share price better reflect the underlying value, therefore enhancing the equity fund, raising options in the future.
DCF valuation and yield; Key risk is credit risk.
The two key valuation matrices we have employed are DCF and dividend yield. We have valued FSLT at US$1.10/share based on an assumption of US$200m worth of acquisitions in each of FY08-09. This translates to a yield of 9% in 2008. For Rickmers, the acquisition pipeline is more visible and we have assumed that it increases its capacity by 2.9x by end 2010. We have a TP of S$2.25/share, which is based on DCF and would imply a FY08 yield of 5.8%. The key risk to shipping trusts relates to credit risk of the charterers. Future cash flows will be in jeopardy
if one of the clients of the vessels does not pay charter fees.
Suntec – SGX
RESULTS OF EXTRAORDINARY GENERAL MEETING HELD ON 8 OCTOBER 2007
(a) the proposed acquisition of a one-third interest in One Raffles Quay;
(b) the proposed issue of up to S$450,000,000 aggregate principal amount of S$ denominated
convertible bonds;
(c) the proposed issue of consideration units to the vendor;
(d) the proposed general mandate for the issue of new units and/or convertible securities; and
(e) the proposed supplement to the trust deed in connection with the valuation of real estate,
as set out in the Notice of EGM dated 18 September 2007 were passed by the unitholders of Suntec REIT at the EGM held today.
AllCo – Phillip
Amidst news of recent aggressive buying sprees in the core CBD area, Allco took the alternative approach by making an acquisition in the CBD fringe area. Allco annouced the acquisition of Keypoint, located at the junction of Beach Road and Jalan Sultan, for a total consideration of $370 million, which is at a discount of 1.18% to the appraised value of $374.4 million.
About the property. Keypoint is an integrated 25-storey commercial building with a total NLA of 311,892 sq ft. The building comprises a three storey podium and a 22-storey office tower. Office space represents 89.4% of the NLA while retail space occupies 10.6%. Allco will acquire the property for a total consideration of $370 million, a discount of 1.18% to the appraised value of $374.4 million, at an initial yield of 4.65%. In addition, the acquisition has an income support deed of up to $10.5 million over a period of two years. The acquisition will be fully funded by debt which will bring gearing up to 46%, slightly past the target range of 40%-45%. The leases have a WALE of 1.05 years contracted at an average of $3.28 psf versus the current asking rate of $6.00 psf.
Valuation and Recommendation. With our revised estimates, we have a forecasted payout of 5.42 cents for FY07 and 7.63 cents for FY08, which translate to 5.0% and 7.1% yields respectively. We retain our fair value estimate of $1.68, pending a review after the 3rd quarter results annoucement later in the month. We view the acquisition favourably, mainly due to the a) spillover demand from the core CBD area, and b) expiring leases that allow Allco to capture positive rental reversions at an opportune time when rentals are on an uptrend. We reiterate our view that Allco’s valuation remains attractive given that it is currently trading at a 22% discount to its book value. We feel that Allco has not caught up to the broad market upswing recently and this presents an entry opportunity.