Ascendas REIT - RHB Invest 2017-12-19: Beneficiary Of A Pick-Up In Industrial Demand

ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Beneficiary Of A Pick-Up In Industrial Demand

Ascendas REIT (A-REIT) is a key beneficiary of the current manufacturing-led GDP growth in Singapore with the bulk 85% of its industrial assets focussed in the domestic market.
The strong manufacturing sector output in Singapore is expected to translate into an industrial demand pick-up albeit with a 2-3 quarter lag. With industrial supply bottoming in 2018 we expect occupancies to improve and rent reversion to stay positive.

Another key growth driver would be yield accretive acquisitions in Australia.
A-REIT remains our Top Pick among the large cap industrial REITs. Maintain BUY with TP of SGD 2.90 (9% upside).

Management noted a pick-up in Singapore (SG) industrial demand in line with recent strong manufacturing growth data (3Q17: 15%YoY). SG portfolio occupancy increased in tandem by 90bps to 90.1% on the back of expansionary and new demand mainly from the technology sector (cyber security, software) and bio-med sectors.
Rent reversion for the recent quarter was also higher at 3.1% (1QFY18 (Mar) : 1.7%) with positive reversions seen across all the sub-sectors.
Overall, we expect positive rent reversions of 2-5% for FY18-19, mainly driven by favourable lease expiries in the business park segment.

Management noted that it likes Australia as it shares similar risk profile to Singapore with assets offering reasonably high yields. It also noted that it could potentially double its Australian exposure to 30% over the medium-term from 15% currently.
We like A-REIT’s strategy of increasing exposure to Australia as the assets are mainly freehold in nature, provides stability with their triple net lease structure, and has in-built annual rental escalations.
Gearing remains at a comfortable 33.1% offering ~ SGD1bn debt headroom for acquisitions (assuming 40% gearing level).

In 2QFY18, A-REIT continued its capital recycling strategy by acquiring a suburban office in Australia (SGD90.3m) and divesting two properties in Singapore (SGD44.1m), at > 10% premium-to-book value. This comes after a busy FY17 where it acquired SGD565.6m worth of assets and divested properties worth SGD441.6m.
We applaud its efforts in delivering unitholder value by divesting lower yielding assets and gaining exposure to higher yielding assets with longer lease tenures.

Only a mere 3.2% of its SG portfolio constitutes single tenant users buildings for renewal in next three years. Thus, we believe A-REIT is at the tail-end of a conversion cycle and this should not be a drag on its EBIT margins and rents.

Our DDM-derived SGD2.90 TP is based on COE of 7.1% and TG of 1.5%.
A-REIT is our Top Pick in the industrial sector and offers a good proxy to the rebounding industrial segment and favourable business park exposure in Singapore.
The stock currently offers FY18F-19F yields of 6% and 6.1% respectively.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-12-19

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 2.900 Same 2.900