We initiate coverage on AME REIT (AMER) with a BUY call and a TP of RM1.35 based on FY24 forward DPU at a targeted yield of 5.1%. We project AMER’s earnings to grow by 16.8%/7.6%/4.2% for FY23f/24f/25f – driven by positive rental reversion and contribution from new assets. We like AMER due to its (i) backing of a sponsor with solid track record, (ii) sponsor and management’s complete suite of capabilities in the supply chain of industrial properties and (iii) unique exposure to workers dormitories.

Property portfolio. AME REIT (AMER) is the largest pure play industrial & industrial related REIT with an asset portfolio comprising 31 industrial properties and 3 industrial related workers’ dormitories. All of which are located across different locations in Iskandar Johor with an aggregate NLA of 1.61m sqft and appraised value of RM557.0m.

Sponsor with proven track record. AME Elite (Sponsor of AMER) is the only listed specialised industrial contractor cum industrial property developer in Malaysia. It has developed five industrial parks and one commercial development carrying a total estimated GDV of RM2.9bn as well as built more than 200 industrial properties in Peninsular Malaysia as a contractor.

Diversified exposure to growing areas. AMER’s tenants mostly consist of global MNCs (90%) from various growing industries operating within E&E, Logistics & E commerce and Packaging. Moreover, no single tenant makes up more than 8.0% of its occupied industrial NLA, offering diversification.

Quality assets translate to robust occupancy rates. Historical blended industrial portfolio occupancy rates have consistently stood above 90% (FY20-9MFY23). AMER also achieved an impeccable 100% renewal rate for FY20-FY22. As at 3QFY23, its industrial properties are fully occupied. Separately, AMER’s worker dormitories are rented out on a master lease agreement with i-Stay (FY20-9MFY23: 100% occupancy rate), which provides a relatively low risk revenue stream to AMER.

Ample debt headroom… As at 31 Dec 2022, AMER’s gearing stood at a comfortable 6%. Assuming a gearing up to the permissible limit (50% stipulated by SC’s guidelines), there is still ample room for acquisitions up to RM508m without equity injection. This would fund acquisitions equivalent to c.90% of AMER’s portfolio value before concerns of equity dilution could start setting in.

…to absorb quality assets from the Sponsor. AMER has been granted the right of first refusal (ROFR) from the Sponsor and its subsidiary i-Park Development for a period of 5 years. Hence, the Sponsor’s existing investment portfolio as well as ongoing and future industrial park developments represent a rich pipeline of high quality assets to augment AMER’s acquisition pathway (i.e. investment properties held under the Sponsor and properties earmarked for leases in i-TechValley).

Steady growth even with existing assets. Factoring in 3 earmarked acquisitions (Plot 43@SAC, Plot15 and 16@Indahpura), we project AMER’s earnings to grow steadily by 16.8%/7.6%/4.2% for FY23-25f, respectively – arising from positive rental reversion and rental contribution upon completion of its ongoing acquisitions.

Initiate with a BUY, TP: RM1.35. We derive a TP of RM1.35 based on FY24 forward DPU at a targeted yield of 5.1% – derived from ascribing a 150bps “premium” to the 3- year historical average yield spread between industrial property REITs in Malaysia (Axis REIT and Atrium REIT) and MAG10YR. We opine the premium is justifiable due to management and Sponsor’s complete suite of capabilities in the supply chain of industrial properties and its unique exposure to workers’ dormitories.

Source: Hong Leong Investment Bank Research - 8 Mar 2023