Ascendas REIT - DBS Research 2016-07-22: Steady returns boosted by Australia

Ascendas REIT - DBS Research 2016-07-22: Steady returns boosted by Australia Ascendas REIT ASCENDAS REAL ESTATE INV TRUST A17U.SI 

Ascendas REIT - Steady returns boosted by Australia

  • 1Q16 results in line; acquisitions continue to drive earnings.
  • Rental reversions to turn flattish but upside will come from filing up close to 17% of vacant space at its multi-tenanted properties.
  • Acquisitions to remain a key earnings driver.
  • BUY, TP S$2.61.



Maintain BUY, TP revised to S$2.61. 

  • Ascendas REIT (A-REIT) should continue to deliver stable returns, with prospective yields of 6.1-6.2%. 
  • The current strong demand for yield plays is expected to support A-REIT’s share price in the immediate term. 
  • BUY!


Modest rental growth despite market headwinds. 

  • Average rentals rose 4.1% during renewals in 1QFY17 (5.1% in 4Q16), which is a good showing despite ongoing headwinds. 
  • The rise came mainly from the Business & Science Park segment (+4.7% in 1Q17) and Logistics & Distribution Centres (+9.4%) and occupancies continued to inch up marginally to 88.3%. 
  • Looking ahead, we believe that the rental reversionary outlook is likely to be more muted given the closing gap between market and passing rent levels.


Acquisitions to drive earnings. 

  • A-REIT acquired assets worth more than S$1bn in Singapore and Australia in FY16 and is searching for more acquisitions within its existing core markets, to compensate for a moderating growth profile. 
  • The medium-term target is to have overseas assets form c.30% of A-REIT’s revenues (from 11% currently). 
  • 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$2.61 as we assume full conversion of its Exchanged Collaterised Securities at end FY17 vs the start of the current financial year. 
  • Maintain BUY on 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/ 2016-07-22
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.61 up 2.55


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