Ascendas REIT - RHB Invest 2017-07-28: Another Solid Quarter

Ascendas REIT - RHB Invest 2017-07-28: Another Solid Quarter ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Another Solid Quarter

  • 1QFY18 results were in line. Portfolio performance saw a healthy improvement with higher occupancy coupled with positive rent reversions. 
  • A-REIT also continued to deliver shareholder value through its efficient capital recycling strategy and asset enhancement initiatives. 
  • Recent positive local economic data points to a potential improvement in industrial demand that should alleviate some of the supply pressure. With a comfortable 33.9% gearing, there is more room for further acquisition- led growth. 
  • Maintain BUY, with a higher TP of SGD2.90 (from SGD2.73, 7% upside). 
  • A-REIT remains our sector Top Pick.

Good improvement in portfolio metrics. 

  • Overall portfolio occupancy rose 1.4ppts QoQ to 91.6% with an improvement in both Singapore-89.2% (4QFY17 (Mar): 88.6%) and Australia-99.8% (96.3%) markets. Key sources of new local demand sectors include transport and storage as well as precision engineering. 
  • Despite the market challenges Ascendas REIT (A-REIT) posted an overall positive rent reversion of 1.7% (Singapore: 1.1% and Australia: 3.5%). 
  • For FY18F-19F, we continue to expect positive rent reversions of 2-5%, mainly driven by favourable lease expiries in the business park segment.

Effective capital recycling strategy. 

  • In 1QFY18, A-REIT further broadened its Australian presence with accretive acquisition of a AUD24.8m logistics property in Melbourne. 
  • The manager also divested a light industrial building in Singapore at a hefty 17% premium to the latest valuation. This comes after a busy FY17 where A-REIT acquired SGD565.6m worth of assets and divested properties worth SGD441.6m. 
  • We applaud its efforts in delivering value to shareholders by divesting in lower yielding assets and gaining exposure to higher yielding assets with longer lease tenures. 
  • A-REIT is also currently embarking on a two asset enhancement and one redevelopment project worth SGD73.5m in total.

Positive economic data bodes well for industrial demand recovery.

  • Singapore Purchasing Managers' Index (PMI) expanded for the 10th straight month in June, boosted by improvements in new orders, new exports, inventory, and factory output. Manufacturing output also rose 13.1% YoY in June, with a sharp growth in the electronics and precision engineering sectors. 
  • While a higher incoming supply continues to put pressure on the light industrial and logistics sector rents, we believe the improving demand condition should help alleviate some of the pain.

Tail-end of its single-tenant to multi-tenant buildings conversion cycle.

  • Only a mere 3.3% of its local portfolio constitutes single tenant user buildings for renewal in the next three years. 
  • We believe A-REIT is at the tail-end of the conversion cycle and this should not be a drag on its EBIT margins and rents.

Maintain BUY, with no changes to our earnings estimates. 

  • We have tweaked our DDM model by lowering our cost of equity (COE) assumption to 7.1% (from 7.5%) to better reflect the current low yielding environment. Our TG remains unchanged at 1.5%. 
  • A-REIT is our Top Pick in the industrial sector, offering a good proxy to the favourable business park segment. The stock currently offers FY18F-19F yields of 5.9% and 6% respectively.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-28
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 2.90 Up 2.730