CIMB Research 2015-07-22: Ascendas REIT - Stable but unexciting outlook. Maintain HOLD.

Stable but unexciting outlook 

  • AREIT reported a stable quarter, with 1QFY3/16 topline and DPU increasing by 10.6% and 5.5%, respectively. 
  • The quarter’s DPU was in line, forming 25% of our full-year forecast. 
  • Looking ahead, we expect the room for further positive rental reversion to remain tight amid a slow acquisition market. 
  • Meanwhile, with fewer conversions from STBs to MTBs planned in FY16 vs. FY15 coupled with rising occupancies in the MTBs, we expect both DPU and NPI margins to stabilize hereon. 
  • Maintain Hold rating with an unchanged DDM-based target price of S$2.52. 
  • Sizeable inorganic growth is a key potential re-rating factor. 

Stable quarter 

  • Ascendas REIT’s (AREIT) 1QFY16 results were in line, with revenue and DPU accounting for 26% and 25% of our full-year estimates respectively. 
  • Stronger topline was mainly due to additional contributions from the acquisitions of Hyflux Innovation Centre, Aperia and the Kendall. 
  • An average positive portfolio rental reversion of 6.6% (vs. 4.4% in 4QFY15) was achieved during the quarter, while portfolio occupancy improved to 88.8% from 87.7% in 4QFY15. 

Margin stabilising 

  • This quarter’s NPI margin was noted to have stabilised at 69% (vs. 67% in 4Q15), as fewer buildings undergo conversions. 
  • Furthermore, as both occupancy and rental reversion at Aperia and properties which were undergoing conversions to MTBs continue to grow, we expect AREIT’s outlook to remain firm for the rest of the year. 
  • Inorganically, AREIT continues to focus on developing its JiaShan Logistic Facility in China and conducting six AEIs in Singapore. 
  • With leverage currently at 34.7%, we believe AREIT will have ample room to continue to explore opportunities in developing business parks and logistics facilities in China’s tier one cities. 

Maintain Hold 

  • On the back of stagnant industrial spot rent and with the spread between existing rates and average market rates estimated at c.4-6%, we believe the room for further positive rental reversion in FY15/16 will remain limited to mid-single digits. 
  • Although AREIT’s portfolio remains defensive, we believe that the stock is fairly valued at current levels. 
  • Maintain Hold rating with an unchanged target price with sizeable projects or acquisitions as key re-rating catalysts. 

(PANG Ti Wee; LOCK Mun Yee; TAN Xuan, CFA)

Source: http://research.itradecimb.com/