Ascendas REIT - RHB Invest 2017-07-28: Another Solid Quarter

ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Another Solid Quarter

1QFY18 results were in line. Portfolio performance saw a healthy improvement with higher occupancy coupled with positive rent reversions.
A-REIT also continued to deliver shareholder value through its efficient capital recycling strategy and asset enhancement initiatives.
Recent positive local economic data points to a potential improvement in industrial demand that should alleviate some of the supply pressure. With a comfortable 33.9% gearing, there is more room for further acquisition- led growth.
Maintain BUY, with a higher TP of SGD2.90 (from SGD2.73, 7% upside).
A-REIT remains our sector Top Pick.

Overall portfolio occupancy rose 1.4ppts QoQ to 91.6% with an improvement in both Singapore-89.2% (4QFY17 (Mar): 88.6%) and Australia-99.8% (96.3%) markets. Key sources of new local demand sectors include transport and storage as well as precision engineering.
Despite the market challenges Ascendas REIT (A-REIT) posted an overall positive rent reversion of 1.7% (Singapore: 1.1% and Australia: 3.5%).
For FY18F-19F, we continue to expect positive rent reversions of 2-5%, mainly driven by favourable lease expiries in the business park segment.

In 1QFY18, A-REIT further broadened its Australian presence with accretive acquisition of a AUD24.8m logistics property in Melbourne.
The manager also divested a light industrial building in Singapore at a hefty 17% premium to the latest valuation. This comes after a busy FY17 where A-REIT acquired SGD565.6m worth of assets and divested properties worth SGD441.6m.
We applaud its efforts in delivering value to shareholders by divesting in lower yielding assets and gaining exposure to higher yielding assets with longer lease tenures.
A-REIT is also currently embarking on a two asset enhancement and one redevelopment project worth SGD73.5m in total.

Singapore Purchasing Managers' Index (PMI) expanded for the 10th straight month in June, boosted by improvements in new orders, new exports, inventory, and factory output. Manufacturing output also rose 13.1% YoY in June, with a sharp growth in the electronics and precision engineering sectors.
While a higher incoming supply continues to put pressure on the light industrial and logistics sector rents, we believe the improving demand condition should help alleviate some of the pain.

Only a mere 3.3% of its local portfolio constitutes single tenant user buildings for renewal in the next three years.
We believe A-REIT is at the tail-end of the conversion cycle and this should not be a drag on its EBIT margins and rents.

We have tweaked our DDM model by lowering our cost of equity (COE) assumption to 7.1% (from 7.5%) to better reflect the current low yielding environment. Our TG remains unchanged at 1.5%.
A-REIT is our Top Pick in the industrial sector, offering a good proxy to the favourable business park segment. The stock currently offers FY18F-19F yields of 5.9% and 6% respectively.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-28

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 2.90 Up 2.730