Singapore REITs - Maybank Kim Eng 2017-04-18: Compounding Industrious Assets, REIT-urning to growth

Singapore REITs - Maybank Kim Eng 2017-04-18: Compounding Industrious Assets, REIT-urning to growth Singapore REITs Outlook Industrial REITs SREIT Review ASCENDAS REAL ESTATE INV TRUST A17U.SI MAPLETREE INDUSTRIAL TRUST ME8U.SI MAPLETREE LOGISTICS TRUST M44U.SI VIVA INDUSTRIAL TRUST T8B.SI CACHE LOGISTICS TRUST K2LU.SI

Singapore REITs - Compounding Industrious Assets, REIT-urning to growth



    REIT-urning to growth 

    • We see industrial REITs as structural beneficiaries of the government’s shift towards higher value-add businesses. The new Singaporean economy, as envisaged by the government, should bolster demand for hi-specs factories and business park space. 
    • Sector fundamentals should bottom out in 2017, as supply peaks and manufacturing growth momentum accelerates. 
    • We see DPU upside levers through acquisitions, asset rejuvenation projects, and the possible relevance of a consolidation theme. 
    • AREIT is our top sector pick.


    New supply tapering, rents to bottom in 2017 

    • Singapore’s industrial sector has seen the effects of policy measures similar to the residential market, with increased supply catering to end-user demand. As a result, from 2014 the industrial sector witnessed a spike in supply completions that should peak in 2017. We expect demand to mean revert in 2017 with growth at 13%, not excessive in our view, given that demand had recovered more strongly in earlier cycles. 
    • Supply surplus, which plagued sector dynamics, should abate in 2018 as demand looks set to exceed new completions. We expect rents to bottom in 2017, and recover in 2018, helped by weaker asset conversion pressures, and positive manufacturing growth momentum. 
    • Further ahead, Singapore’s economic re-modeling efforts should steer industrial demand needs towards hi-specs factories and business parks. 
    • Within the sub-sectors, we believe business parks yield the strongest demand/supply balance, and should offer the best visibility.


    Industrial REITs afford best growth optionality 

    • Returns on capital for industrial REITs would be further enhanced by inorganic growth levers, with acquisitions and asset rejuvenation opportunities facilitating DPU growth optionality. 
    • The larger REITs are better positioned in our view, given their larger asset portfolios, and firm sponsor backing supplementing visible ROFR project pipelines. 
    • We see the possible relevance of a consolidation theme given existing common shareholdings amongst the smaller REITs, with the prominent entry of Warburg Pincus-backed E-Shang Redwood, owning 80% of Cambridge’s REIT manager in Jan 2017. 
    • We believe a key motivation would be to drive scale from AUM growth, which could lower borrowings costs and further boost DPUs.


    REITs are well-cushioned against rising rates 

    • The REITs have taken lessons from the GFC, as evidenced by sector-wide improvement in gearing, and proactive efforts in lengthening out debt maturity profiles, with heightened fixed debt levels in anticipation of eventual rate hikes.
    • Valuations for S-REITs are attractive against developed market peers on dividend yield, P/B and yield spreads against 10-year gov’t bond. With yield spreads close to the long term average, we believe valuations have likely not factored in DPU upside from a recovery in sector fundamentals and inorganic growth initiatives.
    • We see a sustained interest in the REITs, given their steady cashflow and DPU resilience in the absence of stronger assurance on Singapore’s growth outlook.
    • We adopt a bottom-up approach to fundamentals, and expect industrial REITs with strong balance sheets and visible growth drivers to outperform their peers.





    BUY AREIT, MINT and Viva 

    • AREIT is our top sector pick, as it commands the strongest fundamentals and is best leveraged to the government’s pro-growth economic programmes, given its portfolio is geared towards business parks and hi-specs factories. 
    • We recommend BUYs on MINT and Viva. 
    • MINT’s Singapore-focused industrial portfolio stands out for its resilience and clear growth attributes, underpinned by a large, well-diversified tenant base, with rising contribution from ongoing redevelopment and AEI projects to drive strongest DPU growth across the sector. 
    • Viva’s properties are backed up by long-term master leases and rental support till FY18/19, with the growth outlook skewed towards its two large business park assets, on the back of positive rental reversion and post-AEI gains.





    Valuation summary 


    Ascendas REIT 

    • Our TP of SGD2.85 is based on a DDM model. We utilize a DDM-based valuation methodology for REITs given the reliance on underlying asset cashflows as a significant return component. 
    • Key assumptions in our valuation for AREIT include a risk-free rate of 2.5%, a market risk premium of 6.5% against our beta assumptions.
    • Risks to our TP are: i) interest rate impact on valuations, and ii) systemic shocks to the economy slowing down leasing and rents.
    • (BUY to 12.2% upside and 6.4% yield) 

    Mapletree Industrial 

    • Our TP of SGD2.00 is based on a DDM model. We utilize a DDM-based valuation methodology for REITs given the reliance on underlying asset cashflows as a significant return component. 
    • Key assumptions in our valuation for MINT include a risk-free rate of 2.5%, a market risk premium of 6.5% against our beta assumptions.
    • Risks to our TP are: i) interest rate impact on valuations, and ii) systemic shocks to the economy slowing down leasing and rents.
    • (BUY to 11.7% upside and 6.3% yield) 

    Mapletree Logistics 

    • Our TP of SGD1.20 is based on a DDM model. We utilize a DDM-based valuation methodology for REITs given the reliance on underlying asset cashflows as a significant return component. 
    • Key assumptions in our valuation for MLT include a risk-free rate of 2.5%, a market risk premium of 6.5% against our beta assumptions.
    • Risks to our TP are: i) interest rate impact on valuations, ii) systemic shocks to the economy slowing down leasing and rents, and iii) sharp currency swings impeding hedging efforts.
    • (HOLD on 8.1% upside and 7.0% yield) 

    Cache Logistics 

    • Our TP of SGD0.95 is based on a DDM model. We utilize a DDM-based valuation methodology for REITs given the reliance on underlying asset cashflows as a significant return component. 
    • Key assumptions in our valuation for Cache include a risk-free rate of 2.5%, a market risk premium of 6.5% against our beta assumptions.
    • Risks to our TP are: i) interest rate impact on valuations, ii) systemic shocks to the economy slowing down leasing and rents, and iii) sharp currency swings impeding hedging efforts.
    • (HOLD on 9.2% upside and 7.7% yield) 

    Viva Industrial 

    • Our TP of SGD0.95 is based on a DDM model. We utilize a DDM-based valuation methodology for REITs given the reliance on underlying asset cashflows as a significant return component. 
    • Key assumptions in our valuation for Viva include a risk-free rate of 2.5%, a market risk premium of 6.5% against our beta assumptions.
    • Risks to our TP are: i) interest rate impact on valuations, and ii) systemic shocks to the economy slowing down leasing and rents.
    • (BUY to 19.5% upside and 8.3% yield)


    S-REITs Valuation Comparison






    Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-04-18
    Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.850 Same 2.850
    BUY Maintain BUY 2.000 Same 2.000
    HOLD Maintain HOLD 1.200 Same 1.200
    BUY Initiate BUY 0.95 Same 0.95
    HOLD Maintain HOLD 0.950 Same 0.950



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