Ascendas REIT - OCBC Investment 2019-04-30: Cautious Outlook But Growth To Continue

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - Cautious Outlook But Growth To Continue

ASCENDAS REIT (SGX:A17U) reported its 4QFY19 results which met our expectations. Gross revenue and NPI grew 4.3% and 3.5% y-o-y to S$225.1m and S$163.4m, respectively. This was driven largely by acquisitions in Australia and the UK, coupled with contribution from the completed redevelopment at 20 Tuas Avenue 1.
DPU grew 6.1% y-o-y to 4.148 S cents but this was boosted by a one-off distribution of rollover adjustments amounting to S$7.8m, or 0.25 S cents per unit. Excluding this, we estimate that DPU would have declined marginally by 0.3% y-o-y to 3.898 S cents.
For FY19, Ascendas REIT’s NPI rose 3.2% to S$649.6m, while DPU of 16.035 S cents was up 0.3% and accounted for 100.3% of our forecast.

Operationally, Ascendas REIT registered robust rental reversions of 6.6% for its Singapore portfolio in 4QFY19, and this was broad-based across its various business segments. The main driver came from Logistics & Distribution Centres (+9.7%) and Integrated Development, Amenities & Retail (+8.5%).
Overall rental reversions were +3.7% for FY19.
Looking ahead, management has guided for flat rental reversions in FY20 due to supply pressures and ongoing macroeconomic uncertainties. Based on JTC statistics, an estimated 1.2m and 1.6m sqm of industrial space is expected to enter the market in 2Q- 4QCY19 and 2020, respectively.

From a financial standpoint, Ascendas REIT’s balance sheet remains healthy, with an aggregate leverage ratio of 36.3%. This leaves ample debt headroom of ~S$0.7b to fund inorganic growth opportunities before it reaches the 40% gearing level. This would likely come from overseas, in our view, as Ascendas REIT looks to build upon its UK platform and may even consider other European markets should the opportunities arise.
Other growth avenues could come from redevelopment projects, and Ascendas REIT typically targets ROI in excess of 7% for such projects.
After rolling forward our valuations and incorporating a lower risk-free rate assumption of 2.3% (previously 2.7%), our fair value estimate increases from S$2.64 to S$2.74.
Ascendas REIT is currently trading at FY20F distribution yield of 5.4%, which is tight given that it is ~2.4 standard deviations below its 8-year mean of 6.4%, as at the closing price on 29 Apr.
Maintain HOLD.

Andy Wong Teck Ching CFA OCBC Investment Research | https://www.iocbc.com/ 2019-04-30

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.74 UP 2.640