RHB Research initiates ‘buy’ call on AME REIT, with positive growth outlook

• In a note on Thursday (April 13), the research house initiated a target price of RM1.38, with a 17% upside and an about 6% yield forecast for the financial year ended March 31, 2023 (FY2023).
• Occupancy rates of Indahpura and SiLC were 100%, but Senai Airport City reported lower rates of 93% to 95% over the last two years, due to the time gap between termination or expiry of leases and the start of a new lease.

KUALA LUMPUR (April 13): RHB Research initiated its "buy" call for AME Real Estate Investment Trust (REIT) due to its clear pipeline of new developments from AME Elite Consortium Bhd, favourable supply-demand in the industrial property space, and worker dorms as its new high-class assets.

In a note on Thursday (April 13), the research house initiated a target price of RM1.38, with a 17% upside and an about 6% yield forecast for the financial year ended March 31, 2023 (FY2023).

Analysts Wan Muhammad Ammar Affan and Loong Kok Wen said that AME REIT’s yields are based on estimated distributions per unit of 6.0% for FY2024 and 6.2% for FY2025, lower than the average dividend yield of Malaysian REITs (M-REITs) under their coverage of 6.2%.

“Our valuation implies a FY2024 price-to-book value (P/BV) ratio of 1.2 times, which is in line with Axis REIT’s 1.2 times P/BV.

“We view the latter as the closest comparable, considering the similar business model and inorganic growth opportunities via acquisitions of the sponsor’s or third-party assets,” they added.

They also said that the implied valuation indicates a 11% premium to the regional peer average of 1.1 times P/BV, as M-REITs trade at a lower yield and higher P/BV compared to Singapore REITs.

They added that the core net profit estimate for FY2023 is RM32 million, with the commencement of the third dorm’s operations and better rental reversion.

“We expect net income to grow by 5.6% year-on-year (y-o-y) in FY2024 and 3.8% y-o-y in FY2025, as contributions from two of the pipeline assets will start kicking in from FY2024.”

Backed by AME Elite as the sponsor and the industrial property developer and contractor, AME REIT’s portfolio comprises 33 industrial properties and three worker dorms.

“Most of the industrial properties are located within the i-Park branded parks developed by AME Elite”, said the analysts.

Its portfolios are located in Johor, namely Indahpura, Senai Airport City and the Southern Industrial & Logistics Clusters (SiLC).

In March, the REIT announced that it had completed the acquisition of two new properties from its sponsor, with a third expected to be completed in the second half of 2023 — all for a cash consideration of RM69.25 million.

The 170-acre (68.8-hectare) new land in SiLC with a RM1.5 billion gross development value should sustain the flow of assets to be injected into AME REIT over the longer term, said Wan and Loong.

The analysts also added that with 90% of AME REIT tenants being overseas-based manufacturers, the REIT’s rental reversion and occupancy rate have been stable and resilient.

“Since March 2020, AME REIT only had three early termination of leases, as one tenant moved to another facility for expansion purposes, and the vacant space was taken up by a new tenant with a 13-day void period.”

“The remaining two early terminations were replaced with new tenancies, with only a one-day void period recorded for one property.”

Occupancy rates of Indahpura and SiLC were 100%, but Senai Airport City reported lower rates of 93% to 95% over the last two years, due to the time gap between termination or expiry of leases and the start of a new lease.

Wan and Loong stated that the industrial segment is favourable compared to other sub-segments, including commercial retail and office spaces experiencing supply gluts, the slow absorption of space resulted in declining occupancy rates, and depressed or stagnant rental reversions for the segment.

“The risk of oversupply in the industrial segment seems minimal, as most of the announced developments are made on a built-to-suit basis — thereby securing the properties’ long-term tenancies.”

The pandemic further accelerated the e-commerce sector, with a focus on third-party logistics assets to minimise the risk of supply chain disruptions.

“The long-term outlook for the industry looks bright, in view of the continued growth of e-commerce and digitalisation,” said Wan and Loong.

Meanwhile, AME REIT’s three worker dorms with 6,407 total beds as its new asset class are expected to grow rapidly, as local manufacturers will comply with required lodging for workers.

“Although the three dorms only account for 22% of the REIT’s asset value currently, revenue and earnings should see a step-up once a new dorm is injected,” said Wan and Loong.

“Currently, these dorms contribute about 22% of total gross monthly rental income.”

Given the robust demand ahead, AME Elite is expected to build more dorms in the i-TechValley, SiLC and existing i-Park developments, they said.

In terms of inorganic growth, AME REIT will grow rapidly via third-party acquisitions, and could have a debt headroom of RM220 million, assuming a gearing target of 35% in line with the sector average.

At Thursday's noon break, AME REIT’s share price was one sen or 0.85% higher at RM1.19, valuing the group at RM619.87 million.