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

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


DPU support, compelling valuation; Reiterate BUY

  • 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.
  • Catalysts are new redevelopment-led DPU growth.



Recovery slow; redevelopment projects delivering

  • 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.


Sound balance sheet supports growth options

  • 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%.


Swing Factors


Upside 

  • 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. 

Downside

  • 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
SGX Stock Analyst Report BUY Maintain BUY 1.500 Same 1.500



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