Ascendas REIT - OCBC Investment 2017-06-21: Had A Good Run, Time For A Breather

Ascendas REIT - OCBC Investment 2017-06-21: Had A Good Run, Time For A Breather ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Had A Good Run, Time For A Breather

  • Strong outperformance YTD.
  • Modest growth expected.
  • Sydney portfolio a potential bright spot.

Valuations no longer attractive; time to lock in some gains 

  • Ascendas REIT’s (A-REIT) share price has appreciated 19.8% YTD, strongly outperforming the STI (+12.1%) and FTSE ST REIT Index (+12.0%) and making it the second best performing S-REIT
  • Including distributions, AREIT’s total returns YTD stands at an impressive 23.7%. We believe this has been driven by AREIT’s significant exposure to the business park and science park segments in Singapore (37% of portfolio value, as at 31 Mar 2017), which is facing more positive demand and supply dynamics relative to the general industrial market, coupled with expectations of further inorganic growth given its healthy aggregate leverage ratio of 33.8%. The latter provides AREIT with debt headroom of ~S$1.1b before it reaches an aggregate leverage ratio of 40%.
  • However, we opine that valuations are no longer attractive at this juncture, with our forecasted FY18F distribution yield of 5.8% coming in at ~1.4 standard deviations below its 5-year average. 
  • In light of the aforementioned factors, we believe investors can lock in some gains; we downgrade A-REIT to HOLD on valuation grounds, with an unchanged fair value estimate of S$2.66.

Expecting modest DPU growth in FY18 

  • Our downgrade is also premised on our projections for relatively modest DPU growth of 0.9% in FY18, partly due to a full-year effect of an enlarged unit base arising from the conversion of all its Exchangeable Collateralised Securities into units in FY17. 
  • However, we acknowledge that there is potential upside to our DPU forecasts should A-REIT make DPU accretive acquisitions given its ample debt headroom as highlighted earlier.

Industry outlook has brightened, but risks remain 

  • Meanwhile, we note that recent manufacturing and trade data points have been encouraging, such as the strong 23.3% YoY growth in electronics exports and increase in electronics PMI to 52.4 for the month of May. Nevertheless, we believe downside risks remain, and A-REIT has guided for subdued or flat rental reversions in FY18 due to uncertainties over demand and supply pressures. 
  • A bright spot could come from A-REIT’s strong presence in Sydney (50.9% of its Australian portfolio valuation), in our view. JLL has projected average prime rents in the Outer Central West and South Sydney precinct to grow at a CAGR of 2.5% and 3.5% from 2017 to 2021, respectively.

Andy Wong Teck Ching CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-06-21
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