AIMS AMP Capital Industrial REIT Has Fallen By 9% In 6 Months: Can It Be A Bargain?

AIMS AMP Capital Industrial REIT (SGX: O5RU) closed at S$1.365 yesterday. That price represents a fall of 9% over the past six months.

Would the REIT, which owns 26 properties (consisting of warehouses, business parks, and industrial facilities) in Singapore and Australia, be a bargain at S$1.365 after the decline?

The art of value

A REIT’s value should be a key deciding factor for investors when it comes to making an investing decision.

There are two main ways for investors to estimate the value of a REIT. One method works forward, in that an investor will try to estimate the growth rates that a REIT will achieve in important financial metrics like its distribution per unit (DPU) and net asset value per unit.

The other works backward, in that we can look at a REIT’s current price and work out how much growth the market’s expecting the trust to achieve. From that, we can determine if the market’s expectations are reasonable or ridiculous.

Moving backwards

In this example, we’d be using a variant of a simple dividend discount model called the Gordon Growth Model to figure out how much growth in future distribution the market’s expecting AIMS AMP Capital Industrial REIT to achieve.

A dividend discount model is meant to value a company based on the total amount of dividends that the firm would distribute to shareholders in perpetuity; the Gordon Growth Model simply adds in a factor to account for a company’s future growth in dividends. The formula for the Gordon Growth Model is shown below:

Share Price = Expected Dividend Per Share One Year From Now / (Discount Rate – Dividend Growth Rate)

AIMS AMP Capital Industrial REIT’s annual DPU for its fiscal year ended 31 March 2015 (FY2015) was 11.07 Singapore cents, roughly 5.1% higher than the fiscal year before. If we annualise the REIT’s DPU for the first-quarter of FY2016, we’d end up with an annual distribution of 11.0 cents for the whole of FY2016. The number seems reasonable, so let’s stick with it for this exercise.

As for the Discount Rate, the textbook method – which follows the Capital Asset Pricing Model (it’s perfectly acceptable to not follow the CAPM when trying to estimate the value of a stock, but I’d still use the model in here for the sake of completeness) – is to incorporate the risk-free rate as well as the beta of AIMS AMP Capital Industrial REIT.

The risk-free rate is normally taken to be the 10-year government bond yield; currently, the yield on a 10-year Singapore government bond is 2.50% and so, that shall be our risk-free rate.

Meanwhile, the beta of any stock is simply a measure of a stock’s volatility in relation to a broad market index; in AIMS AMP Capital Industrial REIT’s case, data taken from investing research outfit Morningstar has the beta figure pegged at 0.79.

With the explanations out of the way, here’s how the formula for the Discount Rate looks like:

Discount Rate = Risk Free Rate + Beta (Market Return – Risk Free Rate)

You’d notice that there’s one last variable in the Discount Rate formula which I have not discussed, and that is the Market Return.

The Market Return is simply the long-term return of the stock market as a whole. In this exercise, I’d be using the long-run return of the SDPR STI ETF (SGX: ES3), an exchange-traded fund which tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI). Since its inception in April 2002, the SPDR STI ETF has generated a total annual return (inclusive of reinvested dividends) of 7.11%.

So, when we input all the relevant figures into the Discount Rate formula, we’d end up with a Discount Rate of 6.14% for AIMS AMP Capital Industrial REIT.

The next thing we have to do now is to punch all the numbers we have obtained so far into the Gordon Growth Model. This is what we’d end up with:

1.365 = (0.110) / (0.0614 – Dividend Growth Rate)

As you can see, the only variable that’s now unknown in the Gordon Growth Model is AIMS AMP Capital Industrial REIT’s future growth in distribution. Some basic arithmetic will lead us to the conclusion that the market’s expecting the REIT’s future distributions to shrink at an average annual pace of 1.92% over the long-term future.

So what’s the value?

The expected growth rate of (-1.92%) can then be used to compare against our own assessment of what AIMS AMP Capital Industrial REIT may be able to achieve. For a historical perspective, AIMS AMP Capital Industrial REIT’s DPU has stepped up at a compound annual rate of 1.94% from FY2012 to FY2015.

So, based on all the above assumptions, if you expect AIMS AMP Capital Industrial REIT to be able to grow its distributions at a faster clip than (-1.92%) annually, the trust will be undervalued at S$1.365. But, if you’re not confident at all about AIMS AMP Capital Industrial REIT’s growth and think that its future distribution will shrink at an even steeper pace, then S$1.365 might be too high a price to pay.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn't own any shares of companies mention above.