Thursday, 20 March 2008

Why the Bear Rally can't Last

1 comment:

Anonymous said...

Allco Commercial Real Estate Investment Trust ------ Downgrade to UNDERPERFORM

Down with the "mood" swing

Thursday, 20 March 2008

● ALLC has attempted and failed to prevent a Moody's downgrade of its corporate credit rating from Ba1 to Ba2. Moody's is currently keeping ALLC’s rating under review, which could mean a further
possible downgrade.

● This is negative for ALLC, as it could imply a potential refinancing cost. In the event that ALLC cannot get full refinancing, we believe ALLC's potential sale of its A$483 (~S$617) worth of AU assets could also end up in a fire sale, as potential acquirers may take advantage of the situation or find difficulty in funding. Our analysis
suggests a significant dilution of to our TP and DPU in a fire sale
scenario.

● ALLC has outperformed since last Nov. At this level, we see more potential downside risk given the uncertain outlook. We have raised our refinancing costs to 4.5% accordingly, and in turn revised our TP to S$0.78 and downgrade the stock to an UNDERPERFORM.

ALLC has attempted and failed to prevent a Moody’s further downgrade of its corporate credit rating from Ba1 to Ba2. Moody's had
previously conducted a first rating downgrade of ALLC from Baa3 to Ba1 (non-investment grade) on 31st Jan 08. Moody’s is currently keeping ALLC's rating under review, which means a possible
subsequent downgrade.

Revising our numbers and TP

This is negative for ALLC, as it suggests higher refinancing rates.
Accordingly, we have raised our financing cost assumption to 4.5% from 3.0% and in turn revised our TP to S$0.78. On the back of the ratings cut, our 08 DPU has decreased by 21.8% from 9.17 Scts to 7.17 Scts. ALLC currently trades at 0.49 P/B and 9.9% revised 08 yield.

Scenario analysis for asset sale

In the event that ALLC cannot get full refinancing, we believe ALLC’s
potential sale of its A$483 (~S$617) worth of AU assets could also
end up in a fire sale, as potential acquirers may take advantage of the situation or find difficulty in funding. Our sensitivities for its assets sale
at a discount to book and adverse refinancing for remaining loans
suggest a dilution of 08 DPU from 9.17 Scts to 5.20 Scts at about 20%
discount to BV for its asset sale price and 4.50% refinancing rate.
On the back of the cut, our 08 DPU has decreased from 9.17 Scts to 7.10 Scts. ALLC is currently trading at 0.49 P/B, and 9.9% yield.

ALLC has outperformed since last Nov. At this level, we see more downside risk given the uncertain outlook. Three non-executive directors have also resigned from their posts. We downgrade the stock to UNDERPERFORM.