AIMS AMP (AAREIT SP) - Maybank Kim Eng 2018-04-26: Redevelopment Growth Crystalised

AIMS AMP CAP INDUSTRIAL REIT O5RU.SI

AIMS AMP (AAREIT SP) - Redevelopment Growth Crystalised

We have adjusted estimates for AAREIT following 4Q/FY18 results even though FY18 DPU of SGD10.20cts was in line with both our and street estimates.
Negative reversions in light of industrial oversupply are likely to continue in the near term. DPUs should however see support from its fourth completed redevelopment, and its first greenfield build-to-suit (BTS).
Fundamentals remain positive, with potential upside from its newly announced redevelopment project. Our DDM-based Target Price of SGD1.50 (WACC: 8.0%, LTG: 1.5%) suggests 16% total return including the implied 7.6% dividend yield.

AAREIT reported 4Q18 DPU of SGD2.63cts, down 5.4% y-o-y on an expanded unit base from its Dec 2017 placement. While its portfolio occupancy improved q-o-q to 90.5% from 88.4%, the rental reversion of - 24.0% (vg. -15.0% in 3Q18) suggests industrial oversupply headwinds could persist into 2H 2018.
In FY18, AAREIT divested its smallest asset - 10 Soon Lee Road - at 28% above valuation, and secured temporary occupation permits for two projects. Its fourth redevelopment property at 8 Tuas Ave 20 is 83.2% occupied. Its first greenfield BTS development at 51 Marsiling Road, pre-committed to precision engineering specialist Beyonics on a 10-year master lease with annual rental escalations, should contribute from 1Q19.
Management announced plans to redevelop its property at 3 Tuas Ave 2 into a modern ramp-up facility. This should increase GFA by 52% once completed. We will factor this into our estimates once details are available.

Aggregate leverage stood at 33.5% as at end-Mar 2018 down from 37.3% in 2Q18, due to the SGD55m equity increase.
Post-4Q18, AAREIT has secured about SGD240m in committed facilities to lengthen its debt maturity from 1.8 years to 3.3 years. We see further asset rejuvenation opportunities, with about 7% or 0.5m sf of its portfolio GFA under- utilised. We estimate redevelopment projects could boost DPU by 4-5%.

Earlier-than-expected pick-up in leasing demand for light industrial and logistics space driving improvement in occupancy.
Better-than-anticipated rental reversions.
Accretive acquisitions or redevelopment projects.

Prolonged slowdown in economic activity could reduce demand for light industrial and logistics space, resulting in lower occupancy and rental rates.
Termination of long-term leases contributing to weaker portfolio tenant retention rate.
AUD/SGD volatility which could impede hedging efforts and affect DPU.
Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.

Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-04-26

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