DBSVickers Report - 25 March 2008

Allco Commercial REIT (BUY S$0.76 Bloomberg: ALLC SP)
Re-financing issues laid to rest
Price Target : 12-Month S$ 1.23 (Prev S$ 1.54)
By: Singapore Research Team +65 6533 9688

Story: Allco REIT (Allco) share price was hit recently by a spate of negative news ranging from a Moody’s ratings downgrade to ‘Ba2’ in view of its high debt expiry and strategic review to a potential fire sale situation given its inability to obtain re-financing. However, Allco has allayed such unfounded fears by securing an in-principal approval for the extension of its S$550m loan facility expiring in July’08 to end Dec’09. In addition, the proposed strategic review raised concerns of a possible dilutive impact on earnings in the near term.

Point: We have previously maintained that re-financing should not pose much of a problem for Allco given its strong asset base of S$2bn, (of which c. 50% is made up of its Singapore properties) but at a higher price of c. 200 bps above its current rates. The group is in the process of divesting its stake in AWPF and is looking to unlock gains from its Central Park in Perth. As such, we have further adjusted FY08 and FY09 DPU to 6.6cts and 6.8cts to reflect the absence of AWPF. A recent re-composition of its board to include a majority of independent directors is a positive signal to investors as a step in the right direction for good corporate governance and should be viewed positively on a operational, asset divestment and future reinvestment standpoint.

Relevance: With re-financing issues put to rest, a re-rating of Allco would hinge on further newsflow with regards to i) the successful execution of its re-investment plans and organic growth strategies to drive DPU growth which will be partially driven by strong rental reversions from Keypoint offsetting the loss of the income from API and distribution income from AWPF, ii) clarity on the positioning of Allco REIT given API and AFG’s restructuring activities. We maintain BUY on Allco with revised TP of S$1.23 based on a 20% discount to its DCF backed price of S$1.54 on the premise of uncertainties arising from the ongoing restructuring activities at its parent level.