Ascendas REIT (AREIT SP) - Maybank Kim Eng 2017-06-09: Future-Proof Industrialist

Ascendas REIT (AREIT SP) - Maybank Kim Eng 2017-06-09: Future-Proof Industrialist ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT (AREIT SP) - Future-Proof Industrialist


Best proxy for industrial-sector recovery 

  • We update our model post-4Q17 for higher margin assumptions, raising FY18-20E DPU by 0-2%. Our new DDM-based TP is SGD2.90 (from SGD2.85). AREIT remains our top industrial-sector pick with the best exposure to a sector recovery, in our view. 
  • An expected tapering off of new supply in 2017 is expected to benefit its well-entrenched business parks and hi-spec industrial properties. 
  • With debt headroom estimated at 14-27% of its market cap, we see DPU upside from potential acquisitions. 
  • Reiterate BUY.


Strongest portfolio mix 

  • AREIT commands the best asset mix among the industrial S-REITs
  • We think that NPI contributions from its business parks and hi-spec properties – at 59% of AUM - will outpace its portfolio growth, given these properties’ stronger supply-demand visibility. 
  • Asset-conversion pressures have weakened substantially, with just 0.8-1.8% of leases expiring in Singapore till FY19, due to single-tenanted buildings (STBs). This should support both occupancy and NPI margin improvements.


Potential acquisitions to boost growth 

  • We see continued acquisitions from its sponsor’s pipeline of more than SGD1b of business and science parks in Singapore following the SGD420m Science Park Drive deal completed in Feb 2017. In FY17, AREIT divested its China assets to scale up its Australian core, now at 13% of its AUM.
  • AREIT’s balance sheet remains strong with aggregate leverage at 33.8%, below its 10-year average and that of peers. We estimate SGD1.1b/2.1b of debt headroom before it reaches the 40%/45% regulatory thresholds.


Valuations still undemanding 

  • We lift DPU forecasts by 0-2% through FY20E for higher margin assumptions. Even after a 21% YTD rally, valuations remain undemanding against its 14-year average. 
  • BUY for 15% total potential upside to our new TP of SGD2.90. 
  • A key risk lies in the termination of long term leases contributing to weaker portfolio retention rate.


Swing Factors


Upside

  • Earlier-than-expected pick-up in leasing demand driving improvement in occupancy.
  • Better-than-anticipated rental reversion trend.
  • Accretive acquisitions.

Downside

  • Prolonged slowdown in economic activity could reduce demand for industrial space, resulting in lower occupancy and rental rates.
  • Termination of long-term leases contributing to weaker portfolio tenant retention rate.
  • Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.






Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-06-09
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.90 Up 2.850



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