Ascendas REIT - DBS Research 2016-07-12: Powering ahead

Ascendas REIT - DBS Research 2016-07-12: Powering ahead Ascendas REIT ASCENDAS REAL ESTATE INV TRUST A17U.SI 

Ascendas REIT - Powering ahead


Maintain BUY, TP S$2.55. 

  • We continue to believe A-REIT will deliver stable returns, supported by a prospective yield of 6.0- 6.1%. 
  • The Manager, under the new CEO, Mr Chia Nam Toon, will continue to strive to deliver growth and value through a disciplined approach. 
  • Our numbers are tweaked slightly as we update them to reflect recent divestments in China.


Modest rental growth but expected to remain positive despite market headwinds. 

  • A-REIT reported a 7.0% rise in average rentals during renewals in FY16 (5.1% in 4Q16) which in our view is a good showing despite ongoing headwinds. The rise came mainly from the Business & Science Park Segment (+6.6% in 4Q16/+9.6% in FY16) and Logistics & Distribution Centres (+7.4% in 4Q16/6.5% in FY16). 
  • Rental reversionary outlook is likely to turn more muted given closing gap between market and passing rental levels.


Acquisitions to drive earnings. 

  • A-REIT has acquired assets worth more than S$1bn in Singapore and Australia in FY16F and is searching for more acquisitions in its existing core markets, to complement a moderating growth profile. The medium-term target is to have overseas assets form c.30% of A-REIT’s revenues. 
  • In addition, A-REIT has a visible pipeline of over S$1bn worth of business park assets under the Sponsor’s balance sheet which can be acquired in the medium term.


Valuation:

  • Our DCF-based TP is tweaked to S$2.55 as we account for the recent divestments in China. Maintain BUY given total returns of > 10%.


Key Risks to Our View:

  • Interest rate risk. An increase in lending rates will negatively impact distributions. 
  • However, A-REIT's strategy has been to actively manage its exposure and it currently has c.70% of its interest cost hedged into fixed rates.




Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-07-12
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.55 up 2.50


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