Sabana Shari’ah Compliant REIT – 3Q FY11 Results (POEMS)

Buy (Maintained)

Previous Closing Price S$0.905

Target Price S$1.080 (19.3%)

• 3Q11 revenue $17.4m, NPI $16.6m, distributable income $13.6m

• 3Q11 DPU of 2.14 cents

• Incorporated new acquisitions and raised DPU by 1.5-1.8% for FY12-15

• Increased cost of equity to 10% to account for heightened macro-economic risks

• Maintain Buy recommendation but trim target price to $1.080

3Q FY11 results

Sabana REIT reported slightly higher gross revenue and net property income, with an increase of 0.1% q-q to $17.4m and $16.6m respectively in 3Q11. Distributable income was $13.6m, 1.5% q-q lower than previous quarter due to higher other trust expenses. With a dip in distributable income, DPU pared down to 2.14 cents. The cumulative DPU for the reporting period between January and September was 7.36 cents, forming c.72% of our FY11 DPU estimates. Sabana’s portfolio was revalued to $901.3m, up 5.9% from $851.0m last year. Owing to the revaluation surplus, NAV per share inched up to $1.08 inclusive of distributable income as at end-September 2011, from $1.00 as at end-June 2011.

Hit $1 billion asset value set forth in IPO

Four industrial properties were acquired in 3Q11, with a combined GFA of 634,085 sq ft and worth approximately $132.3m. Coupled with the existing property portfolio, the asset value marginally surpasses the $1 billion target and uplifts the aggregate GFA to 3.9 million sq ft. The purchases were wholly funded by debt and therefore DPU accretive. With the incorporation of the purchases, DPU for FY12-15 rose in the range of 1.5-1.8%. While the gearing ratio is expected to increase to c.32.2% upon completion based on our model. This leaves Sabana REIT with a debt headroom of c.$130m given 40% leverage.

Brace for economy slowdown

Singapore’s PMI New Orders and New Export Orders contracted four months in a row, putting a brake on manufacturing sector. The anticipated repercussion will weigh on the demand as industrialists will be more cautious in their expansion plans given the grim global manufacturing data. On the back of heightened recession risk, some industrialists may choose to give up some spaces to save on occupancy costs. 2012 will be challenging year as about 15 million sq ft of industrial space is expected to come on stream. Capital and rental values for industrial property market are likely to stall by the end of 2011. Mild correction in industrial property prices and rents could be on the cards if negative feedback loop in the global economies continued to prevail.

Valuation

All 19 properties except 9 Tai Seng Drive are signed under master lease agreement, with next renewal still a distance (2013) from now. This will bring along income stability to the unit holders. On a side note, we assume occupancy to drop in 2013 as the head tenant may not renew the contract when the bulk of the master leases are to expire. Hence, FY13 DPU will slide down but recover in FY14 and FY15. Another takeaway is that Sabana REIT will keep refinancing risk at bay as loan will only mature in 2H 2013. However, we raised the cost of equity to 10% to take into consideration of escalating macro-economic risks. This trims our target price to $1.08 and it still warrants a buy call with a potential upside 19.3%.