SINGAPORE (Oct 29): Analysts are keeping their “buy” recommendations on AIMS AMP Capital Industrial REIT (AA REIT) on the back of its untapped potential.

“We see DPU growth levers arising from further asset rejuvenation opportunities, with about 7% or 0.5 million sqft of its portfolio GFA (gross floor area) under-utilised,” says Maybank Kim Eng Research analyst Chua Su Tye in a report on Oct 26.

According to Chua, AA REIT’s fundamentals remain positive, and redevelopment growth optionality from its under-utilised GFA offers 4-5% potential DPU upside.

Maybank has an unchanged target price of $1.50 on AA REIT.

The brokerage says its valuation does not factor in contributions from AA REIT’s asset at 3 Tuas Ave 2, which is currently undergoing redevelopment work to transform it into a modern ramp-up facility. This is expected to give the REIT a 52% boost to GFA.

In addition, AA REIT will be undertaking a $13 million asset enhancement initiative at its 29 Woodlands Industrial Park E1 (NorthTech) facility to strengthen its portfolio in Woodlands.

“Both projects are on track for completion in 2H19,” Chua says. “We will factor in contributions from the [Tuas] asset when leasing details are available closer to its completion date.”

Meanwhile, DBS Group Research lead analyst Carmen Tay likes AA REIT for its “diversified asset portfolio and attractive exposure to in-demand properties such as business parks and modern ramp-up facilities”.

“Supported by master leases with built-in rental escalations, AA REIT offers investors a higher degree of income certainty ahead of the sector’s anticipated recovery in 2020 with attractive dividend yields of 7.7-7.9% per annum over FY19F-21F,” Tay says in a report on Oct 26.

DBS is keeping its target price of $1.55 on AA REIT, but Tay says the redevelopment of its under-utilised sites could raise its fair value to $1.65.

“Given the prime location of selected properties, we believe that the manager can potentially redevelop these sites into future-proof assets such as data centres,” says Tay. She estimates that this could lift AA REIT’s proforma FY18 revenue and NAV by 15.8% and 7.9% respectively.

At the same time, Tay believes AA REIT could be a prime acquisition target, given the focus on consolidations among industrial REITs.

AA REIT in 2Q19 reported a 2% drop in DPU to 2.50 cents, from 2.55 cents a year ago, due to an enlarged base. Distributions to unitholders increased by 5% to $17.1 million in 2Q19, from $16.3 million a year ago.

See: AA REIT posts 2% lower DPU of 2.5 cents on larger base of units

As at 12.04pm, units of AA REIT is trading flat at $1.34. According to DBS valuations, this implies an estimated price-to-earnings ratio of 14.5 times and a dividend yield of 7.6% for FY19.