Ascendas REIT - DBS Research 2017-07-24: Powering Ahead

Ascendas REIT - DBS Vickers 2017-07-24: Powering Ahead ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Powering Ahead


Maintain BUY, Target Price at S$2.78. 

  • We continue to like Ascendas REIT (A-REIT) for its solid yield of close to c.6.0%, coupled with ample opportunities to drive earnings higher with upside from potential acquisitions yet-to-be priced in, supported by a conservative leverage level of c.34%. 
  • The ability of the Manager to drive value and growth through various market cycles is a testament of the portfolio’s resilience. 
  • We raised our TP to S$2.78 on the back of lower WACC assumptions given brighter operational prospects in 2018.


Where we differ. 

  • Conservative estimates but see upside bias if acquisitions are executed upon. 
  • Going into 2018, given the REIT’s leading operational scale in Singapore and its focus on the Business Park space (37% of earnings), we believe that AREIT is in a strong position to deliver stable returns. In fact, we see ample opportunities that the Manager can deliver earnings surprise on the back of 
    1. ability of the REIT to re-let close to 12% of vacant space in its portfolio, and 
    2. acquisitions which we have not priced in.


Gearing up to acquire; potential fund raisings to strengthen the balance sheet. 

  • The Manager remains on the lookout for acquisitions in Singapore and Australia to complement a fairly flattish rental outlook. 
  • While A-REIT’s low gearing of c.35% offers ample headroom, the strong share price performance (implied yield of c.5.9%) means that new equity could also be issued to fund any meaningful acquisition opportunities.


Valuation

  • Our DCF-based Target Price is raised to S$2.78. 
  • Maintain BUY on the back of total potential returns of c.11%.   


Key Risks to Our View

  • Interest rate risk. An increase in lending rates will negatively impact dividend distributions. However, A-REIT's strategy has been to actively manage its exposure and it currently has c.80% of its interest cost hedged into fixed rates.




Derek TAN DBS Vickers | Singapore Research Team DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-07-24
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.78 Up 2.650



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