Ascendas REIT - RHB Invest 2018-10-26: Overseas Expansions Offset Near-Term SG Weakness


Ascendas REIT - Overseas Expansions Offset Near-Term SG Weakness

  • Maintain BUY, Target Price of SGD 2.90, 12% upside.
  • While Ascendas REIT’s Singapore logistics portfolio saw slight weakness during the quarter, we believe the slowdown in supply and its diversified exposure across industrial segments should offset the impact in coming quarter.
  • Ascendas REIT has also been actively expanding overseas (in the UK recently), with the purchase of 38 logistics assets for ~SGD0.8bn. It remains confident on the UK market’s long-term prospects, despite near-term Brexit concerns, with the assets’ freehold nature and long WALE adding value.
  • Ascendas REIT remains our preferred pick among the industrial REITs, due to its dominant position in the industrial segment in Singapore, and its stock liquidity.

2QFY19 DPU down by 4.2%Y-o-y.

  • The lower DPU was due to the timing difference from the recent placement exercise, slightly higher interest expense and lower contributions from Singapore assets. The results are in line with 2Q/1HFY18 numbers, at 24%/48% of our full-year DPU forecasts.
  • With the contributions from recent UK acquisitions kicking in, we expect a better 2HFY19.

Slight weakness in Singapore logistics portfolio.

  • During the quarter, Ascendas REIT’s Singapore assets’ occupancy rate dipped 87.1%. This was mainly due to the non-renewal of contracts at its logistics properties, 40 Penjuru 9 Changi South come as a huge influx of supply from 2H18/1Q19. However, with the peak of occupancy rates to improve in 2019.
  • Management also cautioned that industrial tenants have become late, potentially due to ongoing trade downsizing, and others taking a longer leases.
  • While we are unclear at the trade tensions demand, the slowdown in industrial supply from 2019 mitigates some of this weakness, in our view.
  • There is also a possibility of countries in the region being shifted to Singapore, if trade maintain our positive outlook on industrial sector rental rates for 2019.

Rental reversions remain positive.

  • Despite challenges, its portfolio achieved positive rental reversions of 2.3% during the quarter, with all segments recording positive reversions.
  • The business and science park segment saw the highest positive reversion of 3%. Key sources of new industrial demand were transport & storage, precision engineering, and food products & beverages.

Doubling down on its UK exposure.

  • Ascendas REIT further expanded October, by acquiring a second UK for GBP257.5m (SGD459.2m). The assets are fully occupied (including rental guarantees) and offer an initial NPI yield of 5.54 years.
  • Earlier in August, Ascendas REIT completed the properties for GBP207.3m (SGD373.2m). The UK now accounts for 8% of total Singapore, Australia.

Gearing to increase to 37%; no plans to raise additional equity.

  • Management noted that after its recent placement exercise (raised SGD452m in Sep 2018) and the debt drawdown to fund recent acquisitions, net gearing should move up to 37% (now at 33.2%), which it deems as comfortable.
  • For the UK asset purchases, it has fully hedged its balance sheet exposure, with 100% borrowings in GBP. Management noted that the GBP-based borrowing costs for acquisitions are 2.2-2.45%.
  • Ascendas REIT is also still exploring the possibility of partially funding the development of a build-to-suit facility in Singapore, with land applications currently in progress.

Still our preferred industrial segment pick, Target Price of SGD2.90.

  • We maintain our estimates, pending further talks with management.
  • Our DDM-derived Target Price is based on CoE of 7.3% and TG of 1.5%. Ascendas REIT currently offers FY19F-20F yields of 6.4%/6.6%.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-10-26
SGX Stock Analyst Report BUY MAINTAIN BUY 2.900 SAME 2.900