Ascendas REIT - Remains the preferred pick in industrial space
- We reiterate our BUY rating and maintain our earnings/DPU forecast.
- Our unchanged DDM-based TP of SGD2.65 is based on CoE of 7.5% and Tg of 1.5%. The stock offers FY16/17 dividend yield of 6.6%.
- 3QFY17 DPU rose 1.2% YoY to 3.993 cents, meeting 25.2%of our full year forecast.
- Growth was aided by contributions from the Australia Portfolio, ONE@Changi City and lower property taxes and utilities expenses.
- Rental reversion remained positive at +3.0%. We expect AREIT to report positive rent reversions of 2-5% for FY17 despite market challenges.
- Portfolio occupancy improved 0.9ppt QoQ to 90.2% with both Singapore (+0.2ppt) and Australia (+3.3ppt) witnessing improvement in occupancy.
- In 3QFY16/17 AREIT acquired DSO National Laboratories buildings and DNV GL Technology Centre from sponsor Ascendas Land for SGD 437.5m. The acquisition is yield accretive and will start positively contributing from current quarter.
- Management has been active in recycling capital as it has divested all three of its properties in China last year and increasing its exposure in Australia (13% of portfolio).
- During the quarter, SGD66.5m of Exchangeable Collateralised Securities (ECS) were converted into units. The REIT manager has also agreed to convert remaining SGD11.25m of remaining ECS into units yesterday.
- Only about 5% of Singapore portfolio made up of single tenant users buildings are due for renewal over next three years. We believe AREIT's Singapore portfolio is at the tail-end of conversion cycle and therefore we do not expect this to drag its EBIT margins and rents lower.
- AREIT’s gearing stands at comfortable 31.8% as a result of the divestments and conversion of ECS. We assess that the REIT has a debt headroom of more than SGD2bn enabling it to capitalise on more acquisition opportunities.
- Asset enhancement works at AzkoNobel House has been completed. The move is timely amidst increasing competition in industrial space.
- We continue to like AREIT as it is the best proxy to the highly-resilient business park/science park space in Singapore. In addition, its Australian acquisition do provide stability.
- The risks related to conversion of properties to multi tenanted buildings are much lower as compared to its peers.
- Lastly, its expiring leases are currently yielding below market rents, which will provide organic growth for the REIT.
- We reiterate BUY rating with TP of SGD 2.65.