RHB Research 2015-07-23: Ascendas REIT - Operating Trends Are Sustained. Maintain NEUTRAL.

Operating Trends Are Sustained

  • 1QFY16 (Mar) results were in line with our estimates. 
  • Maintain NEUTRAL, with a lower DDM-based TP of SGD2.51 (3.3% upside) with a 6.3% dividend (total return: 9.6%). 
  • The REIT has SGD125.3m in ongoing asset enhancements and development works due for completion by early 2016 to buffer downside risks. 
  • We advise investors to stay on the sidelines for now, as the Singapore industrial outlook remains challenging and is still some distance away from bottoming out. 

 No surprises; operating metrics remain steadfast. 

  • Ascendas REIT’s 1QFY16 DPU rose 5.5% YoY to 3.841 cents, underpinned by higher occupancy rates, a 6.6% (previously 4.4%) positive rental reversion and new acquisitions of Aperia, Hyflux Innovation Centre and The Kendall, which accounted for 25% of our full-year estimate. 
  • Aperia, a new integrated development at the city’s fringe that was completed less than a year ago, has secured 84.7% committed occupancy. 
  • In China, occupancy at A-REIT City @Jinqiao (Shanghai) improved to 58.1%, with another 2.1% of net lettable area being pre-committed. 
  • Last quarter, Ascendas REIT completed the amenities block, Sparkle, which links The Aries and The Gemini in Singapore Science Park II. 
  • The land titles of both properties have been amalgamated and the REIT will be reporting both buildings as a single property going forward. 
  • Its financing cost remained low, at 2.76%, with an average term of debt of 3.8 years. 
  • Based on a disclosed interest rate sensitivity analysis, DPU would decline by ~1%, or 0.18 cents, for every 50bps increase in interest rates. 

 Kept busy by ongoing AEIs/development projects. 

  • In the midst of a challenging industrial property market, the REIT keeps itself active with six asset enhancement initiatives (AEIs) and one development in both Singapore and China. 
  • Management said these projects are worth a total of SGD125.3m, and are expected to be completed by 1Q16. 
  • Three new AEIs at Acer Building, Cintech I to IV and Honeywell Building were announced this round, with an estimated total value of SGD27.6m. 

 Stay put for now. 

  • Despite a higher portfolio occupancy, we note that the average rent (see Figure 3) for all of the REIT’s segments were the same or lower in 1QFY16, with the exception of its business & science park (city fringe) unit, signifying a challenging environment for landlords. 
  • In addition, we think the tightening government policies also make it harder to source for eligible new tenants. 
  • Reiterate NEUTRAL with a lower TP of SGD2.51 (from SGD2.60). 

(Ong Kian Lin, Ivan Looi)

Source: http://www.rhbgroup.com/