BSDREIT RM1.12 (IPO:RM0.99)

Riding on CPO up-cyclle

First plantation REIT
Al-Hadharah Boustead REIT (BREIT) owns two palm oil mills and 8 plantation
estates in Peninsular Malaysia with 95% of matured planted area. The average
FFB yield for these estates is in line with the average yield for Malaysia at
20%. BREIT is the first Islamic oil palm plantation. It has an initial investment
portfolio of RM472m and is managed by Boustead REIT Managers Sdn Bhd, a
subsidiary of Lembaga Tabung Angkatan Tentera.
Stable rental income coupled with profit sharing scheme
BREIT's plantation assets are leased to subsidiaries of the Boustead group for
a 3-year renewable tenancy for up to 30 years. Rental is RM41.3m p.a. for the
first 3 years. In addition, BREIT will enjoy a 50:50 annual profit sharing of the
net incremental income based on the actual CPO price realized for the year
above the reference price of RM1,500 per MT for the first 3 years.
Nevertheless, BREIT will not bear any downside risk if CPO price is below
RM1500/MT. The new rental rate and pegged CPO price are subject to
negotiation upon renewal after 3 years.
Upside potential to yields
BREIT plans to distribute at least 98% of its net income for FY07-09, which
translates into a FY07 gross yield of 7.4% based on retail IPO price of
RM0.99/unit. According to a sensitivity study by BREIT, a RM100/MT increase
in CPO price would enhance FY07 net earnings by RM2m or 6.1%, while a 5%
increase in planting cost would reduce net earnings by 0.6%. More details on
the sensitivity on net earnings and yields are illustrated in Fig.2 and 3. For
FY07-08, we estimate DPU of 8.9sen and 9.9sen respectively based on our
projected CPO price of RM1,950/MT and RM2,100/MT for CY07-08
respectively.
Favour BREIT for leverage to rising CPO price and attractive yield
We favour BREIT for its leverage to the rising CPO price and limited downside
risk. Yield is supported by stable rental income of RM41m, which provides
DPU of at least 7.4sen or gross yield of 7.4% based on retail offer price of
RM0.99/unit. BREIT's gross yield is also significantly higher than the average
gross dividend yield of 2.2% offer by the plantation stocks. In addition, there is
upside potential to earnings with potential new acquisitions. BREIT's second
phase of acquisition is likely to involve Boustead group's plantation portfolio in
excess of RM1bn. BREIT has zero gearing and this provides rooms for future
growth.

Fair value estimate of RM1.24/unit
We derive a fair value of RM1.24/unit for BREIT based on the average
valuations of our DDM and DCF models (refer to Fig. 5 & 6). Based on our fair
value, the implied yield spread against 10-year MGS is 3.5%, which is 20%
below the average yield spread of 4.4% for MREIT (refer to Fig. 7& 8). The
lower yield spread is justifiable given the upside potential from higher CPO
price. Key risks to BREIT include fluctuation in CPO price and interest rates.
Lower CPO price may result in lower rental income after FY09. Nevertheless,
we believe that the risk is minimal given that the tenants are companies under
Boustead group.

IPO Timetable
Opening of applications Jan 15
Closing of retail offering Jan 26
Closing of institutional offering Jan 26
Balloting of applications Jan 30
Allotment date Feb 2
Tentative listing date Feb 8
Size of Offering
Institutional issues (m) 198.0
Public issue (m) 20.0
Directors and employees (m) 2.0
Total (m) 220.0
Price and Key Data
Issue price (RM) 0.99
Issued units (m) 472.0
Mkt Cap @ IPO (RMm) 467.3
Over subscription (x) 8.02
Financial Data
NTA per unit (RM) 1.00
P/NTA (x) 1.0
FY07 EPS (sen)* 7.4
Gross yield @ IPO (%) 7.4
Gross gearing (%) -
* IPO prospectus
Major Shareholders Post IPO
Boustead Holdings 45.0%