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 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.

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.

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.

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.

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