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Broker's take: DBS initiates 'buy' on AA Reit

DBS Group Research on Tuesday initiated a "buy" rating on Aims AMP Capital Industrial Reit (AA Reit) with a 12-month target price of S$1.55, representing a 13 per cent upside to its closing price of S$1.38 on Monday. 

The broker added that redevelopment of AA Reit's underutilised sites could raise its fair value estimate to S$1.65. 

As at 9.25am on Tuesday, the counter was trading flat at S$1.38 apiece. 

DBS analysts Carmen Tay and Derek Tan noted that the Reit (real estate investment trust), which is predominantly focused on the Singapore market, has a diversified asset portfolio, and an attractive exposure to in-demand properties such as business parks and modern ramp-up facilities.

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They deem the counter to be a resilient industrial gem, and forecast above-average yields of 7.4 to 7.6 per cent over fiscal years 2019 through 2021. 

"Supported by master leases with built-in rental escalations, AA Reit offers investors a higher degree of income certainty ahead of the sector’s anticipated recovery in 2020," the analysts said. 

They also anticipate that the redevelopment of AA Reit's unutilised gross floor area (GFA) could raise its revenue by about 16 per cent, and its net asset value by 7.9 per cent.  

"AA Reit is unique for its 600,000 square feet of untapped GFA - one of the highest amongst peers. Given the prime location of selected properties, we believe that the manager can potentially redevelop these sites into future-proof assets, such as data centres."

In addition, the analysts suggest that with consolidations among industrial Reits in focus now, AA Reit could be a potential target - given its fragmented shareholding structure, and access to untapped GFA.

"Including untapped GFA, AA Reit's implied yield (NPI/EV) of 6.4 per cent would place them at the upper end of its peer range of 5.1 per cent to 6.6 per cent."

Nonetheless, key risks include lower rental income arising from increased competition, and prolonged negative rental reversionary trends, DBS said. 

The Reit has a market cap of about US$698 million. 

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