Ascendas REIT - Maybank Kim Eng 2018-10-26: A Slower Quarter…

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - A Slower Quarter…

Ascendas REIT's 2Q19 DPU was below our forecast due to weaker Singapore occupancies. We cut DPU by 4-5% to reflect this, as well as the recently completed second UK deal and new units issued. Lower Singapore contributions were offset by its rising overseas growth engines.
We continue to like Ascendas REIT for its scale and see it as the best proxy to recovering sector fundamentals given its concentrated business parks and high-specs portfolio. Following its UK entry, we see further momentum in its diversification initiatives to drive upside to our FY19-21E 2.8% DPU CAGR.

Our DDM-based Target Price is revised down slightly to SGD2.95 (COE: 7.4%, LTG: 2.0%). Supported by 20% total return upside, maintain BUY.

Ascendas rose 1.1% y-o-y with contributions in Australia (100, 108 Street), the UK (first 12 logistics property logistics portfolio) and redevelopment Singapore (20 Ave1). NPI dipped 1.0% y-o-y with the reversal of 2Q18.
DPU fell 4.2% y-o-y on higher interest units.
Portfolio overseas assets, Singapore fell q-o-q from 88.1% to 7.1%. This was largely due to non-renewals at logistics properties 40 Lane and 9 South 3.
Ascendas REIT achieved +2.3% rental stronger +10.5% in 1Q19 a year ago, and expects this to FY18.

Management sounded a more sombre tone on its Singapore operations as tenants are still rationalising against a tail-end of high supply. However, Ascendas REIT sees opportunities to scale up its UK AUM with more accretive single-asset deals. Its Singapore properties meanwhile could support stronger redevelopment potential over the medium term.

We factor in recently completed deals, including the second UK portfolio acquisition at GBP257.5m (SGD459.2m) partially funded by the 7 Sep SGD452.1m equity fund raising (178.0m new units at SGD2.54/unit).
Meanwhile an announcement of its proposed build-to-suit facility development in Singapore at SGD109.0m is likely forthcoming.

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 Research | https://www.maybank-ke.com.sg/ 2018-10-26

SGX Stock Analyst Report BUY MAINTAIN BUY 2.95 DOWN 3.050