Brokers' take: DBS upgrades Aims Apac Reit to 'buy', cites attractive valuation

DBS group research has upgraded Aims Apac Reit (AA Reit) to "buy" from "hold" with a target price of S$1.60, pointing to attractive valuations.

In a research note released on Friday, the analysts highlighted that the call is driven by the Reit's accretive acquisition of the Woolworths Headquarters (HQ) in Sydney, in September, which will drive a distribution per unit (DPU) yield of 9 per cent in FY2023.

The acquisition offers an attractive accretion of 4 per cent to DPU, added analysts Dale Lai and Derek Tan.

AA Reit shares were down S$0.02 or 1.4 per cent at S$1.42 as at 1.04pm on Friday.

Looking forward to the acquisition of 315 Alexandra Road in Singapore which is expected to complete in FY2022 and the stock's recent inclusion into the FTSE EPRA NAREIT Developed Asia Index, the analysts said: "We believe the improved trading liquidity of AA Reit and potential lowering in cost of equity would enable it to embark on further accretive acquisitions despite the stiff competition for good quality income-producing assets."

The new target price of S$1.60 is based on discounted cash flow and an assumed discount rate of 6.5 per cent taking into account a risk-free rate of 2.5 per cent. The target price implies a target yield of 5.9 per cent at FY2023 and a price to net asset value ratio of 1.19x, the report added.

The analysts also view their estimates as more conservative owing to an assumed potential equity fundraising of S$100million by the Reit to manage its balance sheet. With the key risk being further delays in the completion of the 315 Alexandra Road acquisition, the analysts still believe that fundraising of less than S$100 million presents upside to the Reit's earnings estimates.

AA Reit's built-in rental escalation of 2.75 per cent per annum; potential to increase net lettable area by up to four times; and the potential increase of leverage to 42 per cent when the acquisition of 315 Alexandra Road is complete - are key supporting thoughts behind the "buy" call underscored by the research.

"Although the timing difference between the issuance of the perpetuals and the completion of Woolworths HQ acquisition will lead to some drag on AA Reit's FY2022 DPU, we look forward to the property's full year contribution from FY2023.

"As such, we have rolled forward our valuation for AAReit, while assuming a S$100 million equity fundraising by end of FY2022, and the completion of the acquisition of 315 Alexandra Road in Q4 2022," said the analysts.