Ascendas India Trust - DBS Research 2017-07-25: Taking A Breather For Now

Ascendas India Trust - DBS Vickers 2017-07-25: Taking A Breather For Now ASCENDAS INDIA TRUST CY6U.SI

Ascendas India Trust - Taking A Breather For Now

  • 1Q18 DPU of 1.31 Scts (-4% y-o-y) below expectations.
  • Results impacted by realised losses on hedges and one-off settlement costs related to tenant remixing.
  • Despite a soft start, still expect a-iTrust to still deliver DPU growth on the back of announced acquisitions. 

Wait for better entry point. 

  • We downgrade Ascendas India Trust (a-iTrust) to HOLD from BUY, with a revised Target Price of S$1.15. 
  • Since upgrading the stock to BUY 18 months ago, a-iTrust has rallied over 30%. However, with a weaker-than-expected 1Q18 results and limited upside to our TP, we expect a-iTrust’s share price to pause for breath. 
  • We suggest that investors wait for a better entry point, to gain exposure to a well-managed and expanding Indian business space portfolio.


Soft start to the year. 1Q18 below expectations

  • 1Q18 came in 4% lower y-o-y at 1.31 Scts, which was below our expectations. The weaker-than-expected result was due to realised loss on income hedges of c.S$1m, a one-off settlement of S$0.7m arising from an on-ongoing initiative to revamp and refresh the tenant mix at ITPB and our overestimation of interest income. Excluding this one-off settlement, 1Q18 DPU would have been flat y-o-y.
  • Meanwhile, underlying revenues and NPI in INR terms rose 22% and 21% y-o-y, respectively. In SGD terms, revenue and NPI grew 30% and 29%, respectively, largely on the back of a stronger INR. 
  • The growth achieved in 1Q18 was underpinned by income from recent acquisitions such as BlueRidge 2 and aVance as well as the impact from the positive rental reversions achieved in 1Q18 and the past few quarters.
  • Overall portfolio occupancy remains healthy at 92% or 97%, excluding the recently acquired BlueRidge 2. Occupancy at BlueRidge 2, which stood at 55% the point of acquisition, has since improved to 62% (committed) with an additional 7.3% of space under advanced discussions. a-iTrust guided that while there is interest in the property, it may potentially take a year before BlueRidge 2 reduces its vacancy rate significantly.

Favourable market dynamics still in place

  • We understand, based on guidance from a-iTrust and data from CBRE, that the key markets that a-iTrust’s properties are located in continue to have favourable demand-and-supply fundamentals with falling vacancies and rising rents.
  • Thus, a-iTrust continues to expect healthy rental reversions moving forward - double digit in Chennai and low- to mid-single digits in Bangalore and Hyderabad.
  • With 21% (down from 26% at end 4Q17) and 13% of leases up for renewal for the remainder of FY18 and FY19 respectively, a-iTrust is well placed to capture the upside in rents.

Strong financial position

  • Gearing inched up to 30% from 29% at end 4Q17, and we expect a-iTrust’s gearing to settle around the 33-34% level post the announced acquisitions and new developments. However, a-iTrust would still remain in a strong financial position.
  • Average cost of debt dipped to 6.5% debt from 6.8% at end 4Q18. However, this is expected to inch higher once the proportion of INR debt rises back closer to the 75% level from 70% currently.
  • The proportion of fixed-rate debt also remains high at 96%.
  • Adjusted NAV per unit was steady at S$1.05. 

Trimming DPU estimates

  • On the back of the weaker-than-expected 1Q18 results, we have trimmed our FY18-20F DPU by 2- 6%.
  • This also results in a reduction in our DDM-based TP to S$1.15 from S$1.20. 

Growth DPU still expected

  • Despite the weaker-than-expected 1Q18, we still expect a-iTrust to still deliver growth in DPU. We forecast DPU CAGR of 7% between 2017 and 2020.
  • This is underpinned by the recently announced acquisitions and developments as well as the improvement in occupancy for these properties. For example, committed occupancy at Atria and BlueRidge 2 only currently stand at 84.3% and 62%, respectively. Furthermore, we expect a-iTrust to continue to benefit from the healthy growth in rents.
  • Additional upside to our numbers would also come from the acquisition of aVance 5 and 6 with combined 1.76m sqft of space as well as the proposed expansion into the Indian modern warehouse industry. 
  • Currently, a-iTrust is conducting due diligence on 832,000 sqft of warehouse house space. Subject to finalisation of the agreement, the indicative purchase consideration comprises 
    1. an upfront payment of INR 4.34bn (S$94.3m) and 
    2. deferred consideration of up to INR 1bn (S$21.7m) to be paid over the next four years, linked to the achievement of certain performance milestones.

Downgrade to HOLD with revised TP of S$1.15

  • While we remain positive on the long-term outlook for a-iTrust, with limited upside to our revised TP of S$1.15, we downgrade our recommendation to HOLD from BUY.
  • However, we suggest that investors wait for a better entry to gain entry into a well-managed trust with exposure to the growing Indian business space and potentially modern warehouse industry.

Where We Differ – Healthy outlook but priced in for now.

  • Consensus currently has a BUY call on a-iTrust on the back of a positive DPU outlook. While we too remain positive on a-iTrust’s outlook, forecasting DPU CAGR over 2017 to 2020 of around 7% p.a. – on the back of positive rental reversions given favourable demand and supply dynamics in its key markets as well as the ramp-up of earnings from recently acquired or soon to be completed developments – we believe this has largely been priced in for now. 
  • Our HOLD call is based on valuation grounds, given a-iTrust already trades at close to -1SD yield of 5.2%.

Untapped land-bank and move into the warehouse industry.

  • Through its untapped land-bank and sponsor pipeline, a-iTrust has access to over 5m sqft of floor area. Combined with the potential expansion into the Indian modern warehouse space, aiTrust has a visible source of growth over the long term. The ability to execute on these growth opportunities is also supported by its strong balance sheet. 
  • Near term, investors should look out for the finalisation of its proposed acquisition of a warehouse portfolio, as a potential re-entry point.

Key Risks to Our View

  • The key risk to our bullish stance is a significant depreciation of the INR, a downturn in the Indian economy which will depress rents or delays in the completion of announced acquisitions and development projects.

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2017-07-25
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 1.15 Down 1.200