Ascendas REIT - Maybank Kim Eng 2016-05-08: It’ll be tough before it gets better

Ascendas REIT - Maybank Kim Eng 2016-05-08: It’ll be tough before it gets better Ascendas REIT ASCENDAS REAL ESTATE INV TRUST A17U.SI 

Ascendas REIT (AREIT SP) - It’ll be tough before it gets better 


Full-year results. Accumulate on weakness. 

  • Full-year results were expectedly strong from occupancy growth and acquisitions. 
  • The year ahead will be about maintaining occupancy in the face of a weak economy. Investors should accumulate AREIT on market weakness as from 2017 onwards supply will start to tighten, and there could be distribution per unit growth from spare capacity. 
  • We introduce our FY3/19 forecasts and apply our 6.3% yield target to the blended FY3/17-19 DPU. 
  • Maintain BUY with a slightly revised TP to SGD2.57 (- 1.2%) due to exchangeable collateralised securities conversions. 

Fruitful full-year 

  • FY3/16 results were in line; revenue/net property income/DPU were just over 100% of forecasts, growing 13%/15.3%/5.2% YoY. 
  • DPU would have grown 10%, if not for performance fees. 
  • Overall, it was a fruitful year for AREIT despite weak leasing conditions, with growth powered by improved average occupancy (+1.2ppt), still robust rent reversions of 7%, and acquisitions. 

Tough year ahead 

  • The final quarter however revealed that leasing is still challenging; occupancy in Singapore dropped 1ppt QoQ to 87.9%. The drag was mainly due to warehousing, which had a sharp 3.4ppt drop, where oversupply pressures are also more acute. 
  • Business parks improved 1ppt, a product we deem to be more in demand, while high-spec and factories were stable. 
  • In Australia, occupancy improved 0.3ppt. 
  • We expect the year ahead to be tough as the economy seems more uncertain, while supply is still strong. 
  • We expect occupancy at the more generic factories and warehouses to weaken, while business parks and high-spec to be stable at best. 

Spare capacity to fill when supply tightens 

  • Management is optimistic on vacancies being filled but we don’t expect this until 2017 onwards, when supply begins to tighten before becoming very tight in 2018. 
  • Our expected DPU growth of 4%/5.6% reflects this. 
  • Our growth expectations have however been tempered slightly by SGD300m of ECS due for conversion by Jan 2017; the dilution cuts our FY3/17-18 DPU by 2.5%/2%. 
  • We introduce our FY3/19 DPU forecasts.


Swing Factors 

Upside 

  • Occupancy continues its improvement more dramatically than expected. 
  • Spot rents reverse negative trend, reducing the risk of weakening reversions. 
  • Organic growth from asset-enhancement opportunities within the portfolio. 

Downside 

  • Occupancy or rent reversions go south, as 2016 is still an oversupplied market. 
  • Non assertively financed acquisitions, or overpaying. 
  • Interest cost rises faster than expected. We have factored in two rate hikes in line with consensus.


Joshua Tan Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-08
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.57 Down 2.60


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