Broker's take: DBS raises AIMS Apac Reit TP to S$1.50, sees strong earnings rebound

DBS Group Research has raised its target price for AIMS Apac Reit (AA Reit) to S$1.50 from S$1.40 with an unchanged "buy" recommendation, as it projects a strong rebound for the Reit's earnings in FY2022.

In a report on Friday, the research house opined that the market has largely ignored AA Reit's "attractive valuations on all fronts" when compared to its five-year historical average.

At the Reit's unit price of S$1.28, the counter is estimated to trade at a forward yield of 7.5 per cent and price to net asset value ratio (P/NAV) of 0.96 times. Both are close to -1 standard deviation of their historical mean, said DBS, which deems the risk-reward ratio for AA Reit as attractive at this level.

"Based on valuation metrics such as dividend yield and P/NAV multiple, AA Reit is currently trading at spreads that are wider than its historical five-year average. Its average historical spread of 0.32 times implies that AA Reit can potentially trade at P/NAV of 1.22 times and dividend yield could compress by up to 1 per cent," it noted.

The research house projects AA Reit's full-year distribution per unit (DPU) to grow by 9 per cent in FY2022, driven by organic growth in its portfolio as well as the recent acquisitions of Sime Darby Business Centre and 7 Bulim Street.

"Supported by a longer-than-average weighted average lease expiry of 3.9 years and potential redevelopment upside on selected properties, the outlook for the Reit remains bright," it added of the acquisitions.

DBS further estimates that AA Reit is trading at an implied capitalisation rate of about 6 per cent, which it says makes it an attractive candidate for a merger and acquisition deal.

"With complementary assets, AA Reit's portfolio of quality assets in Singapore and Australia, coupled with its untapped GFA, offers potential suitors a stable income stream and an avenue for organic growth," it said.

A likely suitor is the Reit's largest shareholder ESR Cayman, which DBS believes may consider merging the Reit with its other listed vehicle ESR Reit following its failed merger bid with Sabana Reit.

"Compared to Sabana Reit, AA Reit has a larger portfolio of industrial and logistics properties that is currently valued at S$1.7 billion. Two of AA Reit's assets are freehold properties in Australia, and this will complement ESR Reit's ongoing plans to invest in freehold properties overseas to address the issue of the shorter land tenure of its Singapore portfolio," said DBS.

Units of AA Reit ended at S$1.30 on Friday, up by S$0.02 or 1.6 per cent.