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The Business Times - AIMS AMP Capital Industrial Reit will achieve stable and long-term growth

The Business Times  25 April 2013

WE initiate coverage on Aims AMP Capital Industrial Reit (AA-Reit) with a "buy" rating. Based on our dividend discount model, by assuming a terminal growth rate of 2.0 per cent and a cost of equity of 7.8 per cent, we arrive at our target price of $1.90. We believe that the direction the trust's manager is currently taking will benefit the unitholders, thanks to its long-term growth potential.

To drive growth and unlock values within its portfolio, AA-Reit's manager is dedicated to redevelop several of its properties with an under-utilised plot ratio. Recently, its management estimated that up to 50 per cent of the total portfolio has under-utilised plots that could be developed. Through this, the Reit will be able to unlock the values of its existing properties while avoiding the risks of overpaying for an asset, particularly when the capital values of industrial properties in Singapore are currently at their historic highs.
AA-Reit's distribution per unit (DPU) for Q4 FY2013 was 3.14 cents. Revenue rose to $23.8 million while net property income grew by 10.6 per cent y-o-y, mainly due to the additional contribution from a full quarter's rental of Phase One of 20 Gul Way. In the subsequent quarters, we expect it to continue to register strong numbers on the back of the earlier than expected completion of 20 Gul Way and the redevelopment of 103 Defu Lane.
We forecast AA-Reit's DPU to come in at 10.9 cents in FY2014 and 12.0 cents in FY2015, despite the recent placement of 68.8 million new units. As indicated by AA-Reit management, of the capital raised, about 75 per cent of the proceeds will be used to partially fund its properties' redevelopment projects.
Given a clear direction of the deployment of the recently raised capital, the disciplined control of its internal gearing level, and its continued focus in seeking values within its portfolio, we believe that AA-Reit will be able to achieve stable and long-term growth for its unitholders. Currently trading at a 6.4 per cent FY2014 forecasted dividend yield, AA-Reit is one of Singapore's highest-yielding S-Reits.