Ascendas REIT - RHB Invest 2019-03-07: Nearing Fair Value; Now A NEUTRAL


Ascendas REIT - Nearing Fair Value; Now A NEUTRAL

  • Downgrade to NEUTRAL on valuation grounds, SGD2.90 Target Price, 2% upside and 6% FY19F yield.
  • Ascendas REIT (SGX:A17U), our top industrial REIT pick, is among the best-performing S-REITs. Ascendas REIT's YTD share price increase of 10% has outperformed the S-REIT/STI’s 8%/5%. 
  • While we remain optimistic on its prospects of capitalising on an industrial sector turnaround, valuations are approaching its fair value – it is trading at 1.4x P/BV (FY19F yield: 5.7%).

Positive rental reversions to continue, but occupancy rates could see slight negative impact from trade tensions.

  • Despite uncertainties, Ascendas REIT’s portfolio achieved positive rental reversion of 3.2% for 3QFY19. Management expects to see a slight improvement in rental reversions ahead – we estimate this to be c.2-5%. However, occupancy rates for its SG industrial portfolio dipped 1.5ppt y-o-y to 87.3%, which we believe was mainly on weakness in the logistics sector.
  • Management also cautioned during a recent briefing that SG industrial tenants are becoming slightly wary on lease renewals, due to the ongoing trade tensions – with some downsizing and others taking a longer time to firm up on leases.
  • Recent Purchasing Managers’ Index data also points to a slowdown in manufacturing growth. As such, we expect occupancy rates to remain slightly weak for the next few quarters.

Development of Grab headquarters.

  • In January, Ascendas REIT announced that it will develop and manage Grab’s new build-to-suit (BTS) headquarters, at a total development cost of SGD181.2m. The building, to be completed by 4Q20, will be fully leased to Grab for a long tenure of 11+5 years.
  • The yield-accretive deal implies initial NPI yield of 6.4%, and has annual rental rate escalations which should further enhance yields. The transaction increases its exposure to business & science parks to 34% (from 33%) and is a testament to its core expertise of value creation from BTS projects.

Gearing at a comfortable 38%.

  • Post recent acquisitions, Ascendas REIT's gearing is expected to rise to ~38% (3QFY19: 36.7%). Management is comfortable with current gearing levels and does not see the need for further equity-raising.
  • There is still an additional debt headroom of SGD400m, assuming a 40% gearing covenant. We also expect Ascendas REIT to continue its capital recycling strategy of divesting mature assets, which allows for inorganic growth.

Changes to our estimates.

  • We trim FY19-21F DPU by 1-2% to reflect slightly lower occupancy rates and acquisition contributions.
  • Post our downgrade, investors seeking exposure to the SG industrial segment can switch to ESR-REIT (SGX:J91U) (Rating: BUY; Target Price: SGD0.61) which is trading at a relatively attractive 1.1x P/BV with FY19F yield of 8%.

Vijay Natarajan RHB Securities Research | 2019-03-07
SGX Stock Analyst Report NEUTRAL DOWNGRADE BUY 2.900 SAME 2.900