Ascendas REIT
ASCENDAS REAL ESTATE INV TRUST
A17U.SI
Ascendas REIT - Firepower to acquire
- Australia portfolio write-off a dampener to an otherwise good set of 4Q16 results
- Diversified portfolio in terms of asset class and geography to weather through uncertain times
- Slight drop in DPU estimates, factoring assumed conversion of Exchange Collateralised Securities
Maintain BUY, TP S$2.50.
- We continue to believe A-REIT will deliver stable returns, supported by a prospective yield of 6.1%.
- The manager, under the new CEO, Nam Toon, will continue to strive to deliver growth and value through a disciplined approach.
- Gearing of 37% (c.34% post conversion of ECS) will enable the REIT with headroom to acquire.
Modest rental growth but expected to remain positive despite market headwinds.
- A-REIT reported a 7.0% rise in average rentals during renewals in FY16 (5.1% in 4Q16) which in our view is a good showing despite ongoing headwinds.
- The rise came mainly from the Business & Science Park Segment (+6.6% in 4Q16/+9.6% in FY16) and Logistics & Distribution Centres (+7.4% in 4Q16/6.5% in FY16).
- Rental reversionary outlook is likely to turn more muted given closing gap between market and passing rental levels.
- Our estimates are revised downwards to account for potential dilution of ECS securities (estimated 147m new units issued from FY17F; gearing to drop to c.34%).
- We believe this to be conservative given the uncertainty on the timing of the conversion.
Acquisitions to drive earnings.
- A-REIT has acquired assets worth more than S$1bn in Singapore and Australia in FY16F and is in the search for more acquisitions in its existing core markets, to complement a moderating growth profile.
- The medium-term target is to have overseas assets form c.30% of A-REIT’s revenues.
- In addition, A-REIT has a visible pipeline of over S$1bn worth of business park assets under the Sponsor’s balance sheet which can be acquired in the medium term.
Valuation:
- Our DCF-based TP is lowered to S$2.50 as price in potential dilution of S$300m of ECS in our estimates.
- Maintain BUY given total returns of > 10%.
Key Risks to Our View:
- Interest rate risk. An increase in lending rates will negatively impact distributions. However, A-REIT's strategy has been to actively manage its exposure and it currently has c.70% of its interest cost hedged into fixed rates.
Derek Tan
DBS Vickers
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Mervin Song CFA
DBS Vickers
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http://www.dbsvickers.com/
2016-05-18
DBS Vickers
SGX Stock
Analyst Report
2.50
Down
2.52
