Ascendas REIT (AREIT SP) - Maybank Kim Eng 2018-04-24: Broadening Growth Levers

ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT (AREIT SP) - Broadening Growth Levers

We updated our model for Ascendas REIT (AREIT) following weaker than expected 4Q/FY18 results; DPU came in slightly below our estimate, but was in line with the street. After adjusting for recently announced deals, we lower DPUs by 1-3%.
We continue to see AREIT as the best proxy to recovering industrial sector fundamentals, given its concentrated business parks and high-specs portfolio. With a new CEO firmly in place, we expect a pick-up in growth momentum as it effectively recycles capital, which underlies our 3.5% 3-year DPU CAGR estimate.

BUY with 19% total return to DDM-based SGD3.05 Target Price (WACC: 7.0%, LTG: 1.5%).

AREIT’s Mar-18 quarter revenue rose 3.3% y-o-y and NPI 2.5% with the DPU SGD3.91cts (+1.5% y-o-y), bringing FY18 DPU to SGD15.99cts (+1.6% y-o-y). The performance was driven by better Singapore occupancies to 89.5% in 4Q18, up y-o-y and q-o-q.
During FY18, contributions from three Australian acquisitions (SGD225.8m in all) and completed redevelopment/AEI works (SGD52.9m) helped offset lost income from three divestments in Singapore (SGD60.8m).
The -6.8% portfolio rental reversion in 4Q18 was dragged lower by the -18.8% from a single high-specs property lease - a showroom that contributed 40% of renewed space. Excluding this, rental reversion for the high-specs segment would be +1.8%, with the portfolio at +2.4%; management sees improvement in FY19 from +0.7% in FY18.

This was the first analyst briefing for AREIT’s new CEO since his appointment in Jan 2018 and we do not foresee a change in growth strategy.
Key points:
1. further entrenchment in business and science parks both in the near- to medium-term, possibly undertaken via larger scale rejuvenation efforts together with its sponsor; and
2. closer examination of organic assets for divestment, defensive AEI for tenant retention, or more intensive redevelopment projects.
AREIT seems keen to push into other developed markets (Europe, and US), which is well supported with SGD1.0b debt headroom (at 40% leverage).
Reiterate BUY.

Earlier-than-expected pick-up in leasing demand driving improvement in occupancy.
Better-than-anticipated rental reversion trend.
Accretive acquisitions.

Prolonged slowdown in economic activity could reduce demand for industrial space, resulting in lower occupancy and rental rates.
Termination of long-term leases contributing to weaker portfolio tenant retention rate.
Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.

Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-04-24

SGX Stock Analyst Report BUY Maintain BUY 3.050 Same 3.050