Summary

• AME Elite Consortium Bhd (AME Elite) has proposed to establish and list an industrial real estate investment trust (AME REIT) on the Main Market of Bursa Malaysia Securities Bhd. We believe that the spinoff will provide an opportunity for AME Elite to realise and unlock the value of the REIT segment, whilst proposed placements to units of institutional shareholders will bolster AME Elite’s war chest to undertake further landbanking activities.
• We were not surprise on the abovementioned corporate proposal, of which the plans has been on the table in the past. We reckon that the move will be mildly positive in line with AME Elite’s aspirations to position as an industrial REIT specialist.
• The investment portfolio of AME REIT would comprise assets to be identified from existing four industrial leasing properties, namely i-Park@SiLC, i-Park@Indahpura, iPark@Senai Airport City, and District 6. Moving forward, the acquisition of 169.8-ac. industrial land in Johor will further strengthen the industrial REIT segment.
• The group’s i-Parks are equipped with workers’ dormitories that generate sustainable long term income, namely i-Stay@Indahpura and i-Stay@Senai Airport City which provide accommodation to workers. Given that i-Stay@Indahpura has achieved 99% occupancy rate, the group will be allocating RM25.0m in CAPEX to construct 2 new dormitory blocks that will bring additional 2,700 beds. Upon the targeted completion in October 2021, AME will be equipped with more than 8,400 beds.
• At the same time, the proposed AME REIT would also provide stable and recurring income to investors, with at least 90.0% of its income to be distributed as dividends to unitholders. We note that slightly more than half of the current tenants of the industrial properties has more than 5 years of lease under their agreements. Additionally, AME REIT is expected to benefit from lower tax rate compared to prevailing corporate tax rate at an average of 23.4% recorded over the past 4 years.

Valuation & Recommendation

• Given that the corporate exercise is still in pre-mature stage and subject to necessary approvals, we made no changes to our earnings forecast and we maintained out HOLD recommendation on AME with an unchanged target price of RM2.21.
• Our target price is derived by ascribing a higher target PER of 14.0x (from 13.0x) to its revised FY22f EPS of 15.8 sen. The revised target PER is due to the higher valuation of the construction sector as of late that reflects the optimism surrounding Budget 2021. A re-rating is in the cards, should margins recovery come above expectations in subsequent quarters.
• Risks to our recommendation and target price include dependence on the foreign direct investment in Malaysia. A change in government policy that is unfavorable to foreign investors will hinder the sales of their units in the industrial park. Failure to meet targeted orderbook replenishment may derail the prospect of earnings growth.

Source: Mplus Research - 2 Dec 2020