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Science Park redevelopment a long-term catalyst

  • Highly anticipated redevelopment of 1 Science Park Drive has been announced
  • AREIT to hold a 34% stake in the redevelopment that is expected to generate NPI yield of 6.3%
  • Structure of JV with Sponsor minimises development risk for AREIT while offering a ROFR on the remaining stake
  • Maintain BUY with a TP of S$4.00
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Investment Thesis:

Attractively valued relative to other large-cap peers
. A-REIT offers an attractive c.5.2% yield, which is among the highest compared to its other larger cap industrial S-REIT peers. Having acquired more than S$1.7bn YTD, AREIT is on track to deliver DPU CAGR of more than 4.0% between FY20-FY23.

Multiple structural tailwinds in place.
 We believe that investors have neglected A-REIT’s myriad of structural tailwinds from e-commerce, datacenters and office decentralisation, which would drive earnings and capital values higher in the longer term.

Unlocking value from rejuvenation of its Science Park assets. 
While A-REIT can tap its Sponsor for an attractive pipeline of new economy properties, there is significant value from the potential redevelopment of its Science Park assets. The redevelopment of 1 Science Park Drive together with its Sponsor paves the way for c.S$5.6bn in gross development value to be unlocked for its assets at Science Parks 1 and 2.

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Valuation:
Our DCF-based TP is maintained at S$4.00 based on WACC of 5.9% (risk-free rate of 2.0%).

Where we differ:
Redevelopment upside. 
We believe that investors have not priced the NAV uplift from the redevelopment of its other Science Park assets into properties with higher specifications and higher plot ratios.

Key Risks to Our View:
Interest-rate risk.
 An increase in lending rates will negatively impact dividend distributions.