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

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


Adjusting estimates, maintain BUY

  • 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%).



Steady quarter, rental reversion +0.7% for FY18

  • 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.


Stronger momentum on acquisitions, redevelopment

  • 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.


Swing Factors 


Upside 

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

Downside 

  • 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



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