AREIT has been relatively unchanged since the beginning of October, with its share price trading close to its 50-day moving average price of S$2.26. The stock has been trading in a range between S$2.07 and S$2.43 after declining from its high of S$2.86 in mid April.
 
Macquarie Equities Research (MER) issued a report on AREIT on 8 October, reiterating their Outperform recommendation after a comprehensive review of its earnings trajectory. MER has set a 12 month Target Price of S$2.50 based on a Discounted Cash Flow methodology. Here are some excerpts from the report.
 
Impact

FY3/15 Dividend Per Unit should rise 10%, underpinned by full-year contributions from three acquisitions (Nexus@one-north, A-REIT City@Jinqiao and Aperia) and 5 Asset Enhancement Initiatives (AEIs). MER thinks consensus’ FY3/14 DPU of 14.20 S cents (+3.3% YoY) is a tad high, vs. MER’s estimate of 13.80 S cents (+0.5%). MER believes the key difference is in the portfolio occupancy rates, where they are expecting circa 88% (vs. consensus’ 90+%). This could be due to the ongoing AEI at 1 Changi Business Park Ave 1, 31 International Business Park and Techpoint. For every 1% point fall in occupancy, MER’s DPU will decline by 0.6%. The group is expected to report its 2QFY3/14 results in mid-Oct 13.
 
Prospective acquisitions. YTD, AREIT has announced 2 acquisitions – The Galen and DBS Asia Hub Phase 2 for S$149m, which seems light vs. S$673m and S$885m in 2012 and 2011, respectively. While management has guided for a subdued acquisition outlook, MER thinks AREIT could be considering greenfield/brownfield projects. JTC recently launched a site at Tai Seng Street, which covers GFA of 444,000 sqf. Zoned Business 2- White, the site can be developed into an industrial- cum-retail project and is located in a prime location within Paya Lebar iPark. Based on S$250-300 psf per plot ratio, land price of S$110-130m and construction cost of S$70-90m is well within AREIT’s implied debt headroom of S$0.7-1.4b on 35-40% gearing.
 
Valuations still undemanding, despite outperforming the SREITs and FSSTI Index by 3-4% over the past 3 months. MER’s target price of S$2.50 implies FY15E yield of 6.1% and P/B of 1.29x, which appear undemanding vs. its 10- yr mean (ex. Global Financial Crisis) of 6.4% and 1.36x. Existing yield spread of 430bps is also a shade above historical levels of 380bps.
 
Earnings and target price revision

FY14E, FY15E and FY16E DPU adjusted by -5.4%, -4.3% and +0.1%, respectively to factor in changes in interest cost and lower occupancy assumptions. Target Price -3.9% to S$2.50.
 
Action and recommendation

AREIT continues to be the dominant player within Singapore’s industrial property sector given its portfolio of 103 properties across various industrial asset classes and proven development expertise. With a total return of 17%, the stock remains one of MER’s top SREIT picks.

Source: Macquarie Research - 10 Oct 2013