AIMS APAC REIT - DBS Research 2021-02-05: A Banner Year Ahead; Attractive Valuation Metrics On All Fronts


AIMS APAC REIT - A Banner Year Ahead; Attractive Valuation Metrics On All Fronts

  • AIMS APAC REIT's FY22F DPU projected to increase by ~9% y-o-y.
  • Historical valuations suggest AIMS APAC REIT could trade at a tighter dividend yield and P/NAV of 1.22x.
  • AIMS APAC REIT’s attractive implied cap rate of ~6% paves the way for a potential M&A deal.

AIMS APAC REIT - Attractive valuation metrics on all fronts

Room for dividend yields to compress by at least 1.0%

  • AIMS APAC REIT (SGX:O5RU) is currently trading at a forward dividend yield of 7.5%; a 2.5% spread over the average yield of industrial S-REITs (5.0%).
  • Historical 5-year average spread is ~1.5%, implying that AIMS APAC REIT’s yield could potentially compress by 1.0%, on expected mean reversion.

Expect AIMS APAC REIT to trade at a premium to NAV

  • AIMS APAC REIT is currently trading at a P/NAV multiple of 0.96x vs industrial S-REITs’ 1.54x, representing a spread of 0.58x.
  • Historical 5-year average spread is ~0.32x, equivalent to a P/NAV multiple that is closer to 1.22x for AIMS APAC REIT. This implies that investors are not pricing in the potential value of its portfolio which has GFA upside.

Time for AIMS APAC REIT to play catch up

  • With valuation metrics attractive on all fronts (yield, P/NAV basis) and that peers in the industrial S-REITs (especially the larger cap ones) space are already trading at pre-COVID levels, we believe that investors have not accorded AIMS APAC REIT the valuation premium that it deserves.
  • With DPU growth of 9% in FY22, AIMS APAC REIT’s forward yield is attractive underpinned by organic growth in its portfolio and recent acquisitions.

AIMS APAC REIT's FY22 DPU growth underpinned by healthy portfolio metrics

Longer WALE compared to mid-cap peers implies more income visibility

  • AIMS APAC REIT has a long portfolio WALE of 3.9 years vs mid-cap industrial S-REITs’ average of 3.3 years, implying that income is projected to remain stable.
  • Decent remaining land tenure of 35 years; leasehold Singapore assets comprise ~84% of AIMS APAC REIT’s portfolio.
  • ~83% of tenants in AIMS APAC REIT’s portfolio are from industries that are expected to see healthy growth such as IT/Infocomm, Biomedical/Healthcare, Consumer goods and Logistics/Distribution.

Balance sheet moving from “conservative” to “optimal”

  • AIMS APAC REIT’s gearing has been hovering around the 35% level in the past few years and is projected to rise.
  • Including the recent acquisition of Sime Darby Business Centre which will be fully funded by debt, we estimate that AIMS APAC REIT’s gearing will increase to 38%-39%.
  • Given the current low interest environment, gearing levels closer to the 40% level would be optimal.
  • Supported by a healthy interest coverage ratio of 3.8x; there is room for further improvement led by earnings growth and lower cost of financing.

Potential candidate for M&A

Attractive implied cap rate of ~6%

  • AIMS APAC REIT is currently trading at an implied cap rate of ~6%, making it an attractive candidate for an M&A.
  • ESR Cayman is currently AIMS APAC REIT’s single largest shareholder (~13% stake) and could drive a potential merger with SGX-listed ESR-REIT, in which it a combined stake of ~31% with a related shareholder.
  • ESR Cayman recently called off the merger with Sabana REIT; AIMS APAC REIT could be the next potential candidate.
  • Compared to Sabana REIT, AIMS APAC REIT has a larger portfolio of industrial and logistics properties that is currently valued at S$1.7bn.
  • Two of AIMS APAC REIT’s assets (~16% of portfolio) are freehold properties in Australia and this will compliment ESR-REIT’s ongoing plans to invest in freehold properties overseas to address the issue of the shorter land tenure of its Singapore portfolio.
  • AIMS APAC REIT’s portfolio has untapped GFA of more than 502,000 sqft that can provide organic growth in the future.

Our thoughts

Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-02-05
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