UBS has issued a research report giving Link REIT (00823) a Buy rating with a target price of HK$47.2.
Link REIT announced on the evening of November 10 that it would acquire a 50.1% stake in Singapore's Eastpoint Mall from Income Insurance for a total consideration of S$236 million, marking the fund's first acquisition since 2022.
UBS expects the deal to deliver modest accretion of about 0.5% to distribution per unit (DPU), but it may narrow Link REIT's room to further expand its unit buyback program.
UBS cited management as saying that the asset's initial net operating income (NOI) yield is approximately 4.5%, broadly in line with recent market transaction levels. Based on the bank's estimated Singapore dollar financing cost of about 2%, the deal is expected to generate a positive pre-tax spread of roughly 2.5%.
On that basis, the bank estimates DPU accretion of about 0.5%, calculated as S$236 million x (4.5% NOI yield - 2.0% financing cost) x (1 - 17% corporate income tax rate).
Given the limited DPU accretion, UBS expects the market's share price reaction to the acquisition to be largely flat. In addition, the acquisition may signal that Link REIT's room to further expand its buyback program has narrowed in the upcoming interim results.
Link REIT had previously deployed HK$1.4 billion of asset disposal proceeds, generated from the sale of 700 Nathan Road for HK$2.3 billion and the sale of a 50% stake in 100 Market Street for A$226 million.
Over the longer term, UBS noted that given Link REIT's mixed track record on mergers and acquisitions, investors may question whether this and future potential acquisitions can create sustainable shareholder value.
Although the positive spread makes the deal accretive to financial metrics in the short term, given Link REIT's current dividend yield of about 6.3%, the market's focus may remain on whether new capital should be deployed into acquisitions or returned to shareholders through unit buybacks.
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