Singapore REITs - UOB Kay Hian 2015-09-17: Levelling The Playing Field; Hedging Bets Overseas.

Singapore Property .SI  MAPLETREE LOGISTICS TRUST M44U.SI  ASCOTT RESIDENCE TRUST A68U.SI  CAPITALAND COMMERCIAL TRUST C61U.SI 

REITs: Levelling The Playing Field; Hedging Bets Overseas 

  • The recent slew of overseas acquisitions by S-REITs has prompted us to factor in global foreign exchange movements in deriving hedged yields, moving beyond the conventional approach of purely observing raw trading yields. 
  • With the majority of their assets based overseas, top picks MLT and ART stand out in terms of their hedged yields vs current trading yields. 
  • Maintain OVERWEIGHT. 


WHAT’S NEW 


 Levelling the playing field. 

  • We compare REITs on a hedged yield basis by factoring in the effect of forex movements on their overseas derived income and comparing dividend yields. 


ACTION 


 Maintain OVERWEIGHT with MLT, ART, CCT as top picks. 

  • By factoring in the effect of forex movements on S-REITs’ overseas derived income, we have observed clear beneficiaries of diversification amidst a depressed domestic outlook across sectors in the face of a looming supply glut. 
  • We continue to prefer deep value and diversified REITs, noting that ART and MLT offer more appealing hedged trading yields in their respective sectors by virtue of their extensive overseas footprints at 85% and 62% respectively. 


ESSENTIALS 


 Deriving hedged yields using forward currency swaps. 

  • We obtain hedge costs using one-year US dollar forward currency swaps of the respective countries in which the REITs hold assets relative to that of Singapore’s swap rate (base rate). We then obtain the weighted average hedge cost by geographical exposure across the REITs and subtract that from their respective trading yields, leading us to our hedged trading yield figures. This is only a broad-based indicator as the trading yields have not been adjusted for existing hedging policies that vary across different REITs. 
  • Well diversified counters MLT and ART stand out among their peers in terms of hedged trading yields vs raw trading yields. 
  • MLT will see a 37 bp pick-up on a hedged basis compared with a flat 6 bp drop for other industrial REITs. ART will see a 25 bp pick-up compared with the -10 bp-7 bp drop that peers might see. 

 Benefits of diversification. 

  • By factoring in the effect of forex movements on S-REITs, we have observed clear beneficiaries of diversification. We like deep-value and well-diversified REITs with significant overseas footprints, namely ART, CCT, MLT and Starhill. 
  • We believe these counters will see less exposure to the slowdown in Singapore affecting the commercial, industrial, retail and hospitality spaces domestically owing to an unprecedented simultaneous supply glut across these sectors. 
  • REITs with relatively higher exposure to Japan, Hong Kong and Europe are seeing a yield pick-up while those with exposure to Indonesia, Malaysia, Australia and China are seeing declines.


TOP SECTOR PICKS 




  • PEER COMPARISON 



    Vikrant Pandey | Derek Chang | http://research.uobkayhian.com/ UOB KH 2015-09-17
    BUY Maintain BUY 1.28 Same 1.28
    BUY Maintain BUY 1.41 Same 1.41
    BUY Maintain BUY 1.79 Same 1.79


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