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AmanahRaya REIT (MIDF Research July 26,2010) initiating coverage; target price RM1.20

Amanah Raya REITs
Diversified portfolio anchors ARRB’s growth.


• Amanah Raya REITs Bhd (ARRB) is Malaysia’s only fully-diversified REITs with assets presence ranging from hotels, industrial, commercials, education buildings and retail business.

• ARRB’s value can be enhanced by new acquisitions. Management has not discounted the possibility of purchasing healthcare assets,
although availability is an issue.

• Earnings are defensive and locked-in via longer lease terms with an average review every 3 years. This results in consistent dividend yields averaging between 7-8% over past 3 years. Management forecast DPU payments of 7.3sen-7.8sen between 2010-2012.

• ARRB will be a beneficiary of higher demand for industrial and commercial assets under the 10 Malaysia Plan, higher GDP growth in the years ahead, and improved market participation in REITs.

• We initiate coverage with a Target Price of RM1.20. We like ARRB for its consistent yet attractive dividend yield, good spread of risk across asset class, defensive business model with reputable tenants providing low default rates and a healthy balance sheet with room for potential inorganic growth.

BACKGROUND

Amanah Raya REITs (ARRB) was listed on the Bursa Malaysia Main Board on 26 Feb 2007. ARRB is presently Malaysia’s only diversified REITs with asset exposure in hotel tourism, industrial, commercial offices, education sector and recently a retail mall. Present portfolio comprises of 15 assets are located in Kedah and Klang Valley with total asset size of RM913m. The assets are managed by Malik & Kamaruzaman Property management and I.M Global Property Consultant while AmanahRaya REIT Managers (ARRM) remains as the trust sponsor.

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KEY SELLING POINTS

Apart from the rest. ARRB has high exposure to industrial and commercial assets. We reckon the trust is well positioned to leverage from an economic recovery, as demand for such assets will increase in tandem with the domestic economy recovering i.e rising manufacturing and commercial activities. It is also mitigated by its education assets (comprising almost a quarter of total asset base) which tend to be defensive and long-term by nature. More so, having a diversified portfolio enables the REIT to go on a multi-pronged acquisition approach, not limiting its asset acquisition opportunities just to a certain asset type.

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Consistent yield. The trust’s historical average yield ranges between 8-9% with consistent payout of c.95% since 2007. With an average 3-year step-up rate of 4-5%, we believe yields can be sustained. Growth in DPU will be drawn from capital enhancement programs and asset acquisition exercises of which both in turn will warrant higher rental revisions. Note that the most recent tenancy revision saw +8.86% rise in rental rates.

Long-term lease arrangements. Depending on the respective asset type, basic lease tenure ranges between 6 – 15 years. Approximately 73% (or 11 of 15 assets) are presently under 10-year lease tenures. This locks-in the recurring income and safeguards tenant’s commitment. The average balance tenure period across all tenants averages at 6.3 years. More so, the properties are all single-tenanted, assuring 100% occupancy rates. Tenancy profile remains somewhat steady with 16% of total NLA expiring before 2016, the major portion of 50% by 2016 and 34% post-2016.

High deposit levels cushions replacement timeframe. Up to 1-year of lease is required to be deposited by the lessees. This provides ample time for ARRB to source a new tenant and ensures an indirect commitment from the present lessee to uphold its tenancy agreement.

Triple-net lease sustains margins. A triple net lease requires tenants to be responsible for the property expenses which includes maintenance, operation expense, statutory payments as well as the insurance expense. In addition, rental step-up rates are conducted on average every 3 years with an average 4-5% increase. This enables the REIT managers to review adjustment factors based on present market rental price per square foot (psf), inflation rates, depreciation acceleration and etc. However, rental yields may come under pressure revision if the present rental rates revisions are outpaced by changes in capital appreciation.

Economic cycle risk spread across diversified asset types. Given its wide asset portfolio, any form of concentration risk will be mitigated across the trust’s diversified portfolio. This position’s the trust to be resilient against any downfall decline on a specific sector.

Proven capital appreciation. Total assets under management (AUM) assets grew +5.66% over 2007-2009 to RM686.3m. The capital appreciation is derived from management’s capability to further add–value towards on existing assets. Under ARRB’s portfolio, office buildings have the highest average appreciation by asset type (since date of acquisition) at +8.50%. While Industrial property has the lowest capital appreciation asset type, with a mere 3.41% since acquisition. Presently, the trust’s total AUM is at RM913m. Management targets to grow AUM to RM1.0b by 2010.

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KEY RISKS

Possible sell-down by foreign institutions.
Given the trust’s high foreign shareholding between 19-20%, an exit of funds may spell out a i) loss of management trusts, ii) return of funds to support respective domestic economiest as well as iii) loss of confidence on the broad Malaysian property sector. As to date, ARRB’s largest foreign shareholder’s comprise of Royal Bank of Scotland (6.68%). Reference from management reassured that the foreign investors are in ARRB on the long term.

Liquidity of unit size. Shortage of free float may deter new potential investors from subscribing. However, issuance of new units may dilute EPU. At present, ARRB’s free float is 51.6%, higher than Malaysian REITs (M-REITs) average free float percentage is c.46.4% but less liquid in comparison to Singapore REITs of 64.2%.

Asset devaluation due to unfavourable external effects. A delayed economic recovery may rule out favourable capital appreciations. Nevertheless, we can take comfort in knowing that ARRB’s asset value remained steady since first purchase in 2007.

Lacking of quality asset available. Rental yields of assets outside of Klang Valley may pose a challenge. We understand that industrial and commercial properties in Malaysia’ 2 other key property markets i.e Penang and Johor tend to produce unattractive yields. To mitigate the issue, the trust is focusing at other assets classes. One of the notable potentials is healthcare assets.

Unfavourable tax. M-REIT investors are required to pay withholding taxes, 10% for both foreign institutional investors and Malaysian individuals while a foreign corporation are charged 25%. This setback may deter and shy investors from the product and channel funds to other REIT markets such as Singapore REITs, who does not charge such taxes. Such tax brackets may position M-REITs to be unattractive.

OUTLOOK

Organic and Inorganic acquisition route.
We understand from management that several asset acquisitions are in the pipelines. Apart from the recent acquisition of Selayang Mall and Dana 13 offices, we understand management is looking at 3 other potential buildings to be added to the trust. There are also plans for organic growth via the extension of an office annexe tower with a plot ratio of 12.0x to be constructed next to the Amanah Raya building. Approval from DBKL has been obtained and construction is expected to commence by 2011.

Gearing for growth. We believe the trust has the ability to take on more debt to grow its asset size. At present, ARRB’s gearing levels is at 0.34x, still within SC’s requirement of 0.50x (defined as total borrowings/total assets). As such, ARRB has room to raise as much as RM121.0m, a manageable sum with interest coverage ratio and current ratio rising to 2.93x and 0.5x (from 4.19x and 0.36x)

Targets RM1.0b AUM by end-2010. Management shared the trusts target to grow asset under management to RM1.3b by end-2010 and to achieve RM1.5b by 2011. At present, total AUM stands at RM913.3m, including the purchase of Selayang Mall and Dana 13.

Higher yield prospects. Moreover, return yields are higher than traditional steady-yield products i.e fixed deposits (2.75%), 5-year Malaysian Government Bonds (3.84%), EPF yields (5.35%) and KLCI’s forward yield of 2.94%. Our TP price present a x% upside against present listed price of RM0.8x

RECOMMENDATIONS

BUY with initial target price of RM1.20.
Our TP is derived from a Gordon Growth Model DDM based on a conservative discount rate of 10% with a growth rate of 3.5%, a conservative reflection of its average rental renewal rate of 5.67% between 2010-12 across all assets.

Attractive Valuations. Presently, ARRB is trading at PER10.8x and PBV0.87x, below peers’ average PER of 11.4x. Historically, the trust had traded within 4.70x-17.41x over the past 3-years. Valuation wise, we reckon ARRB is marginally undervalued in comparison to peers in terms of both PER and PBV. Injection of new assets class i.e healthcare would warrant a re-rating of ARRB. Historically, most Malaysian REITs trade at a discount against NAV (-9.80% excluding the recently listed Sunway REIT and Capitalmall Malaysia Trust).

We recommend ARRB for low-risk appetite investors seeking defensive earnings with growth potential. We like the trust for its (i) consistent yet attractive dividend yield, (ii) good spread across asset class, (iii) defensive business model with reputable tenants providing low default rates and (iv) healthy balance sheet management and (v) potential room for inorganic growth. We position ARRB as a ‘potential growth-themed REIT’ with the prospective injection of proven quality assets with earnings accretive potential.




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