Ascendas India Trust - DBS Research 2019-07-04: On A Growth Spurt

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ASCENDAS INDIA TRUST (SGX:CY6U)

Ascendas India Trust - On A Growth Spurt

• a-iTrust enters into forward purchase agreement and provides construction funding for Blueridge Phase III.
• Deepens presence in Pune which is seeing rising rents.
• Uplift in DPU from expected decline in Fed funds rate and interest income from construction funding.

One of the fastest-growing S-REITs.

• We maintain our BUY call on ASCENDAS INDIA TRUST (a-iTrust, SGX:CY6U) with a higher Target Price of S$1.55.
• We believe its expansion into modern warehouses since last year heralds a new leg of growth for the Trust. This will provide an additional kicker to its already fast-growing business space sector. This acquisition, combined with recently announced redevelopments/acquisitions, should translate into a 61% increase in floor area and underpins 3-year DPU CAGR of c.10%, 3-4 times faster than the average for the S-REIT sector.

Where We Differ: Above-consensus target price.

• Compared to consensus, we have a higher Target Price of S$1.55, pegged at a c.20% premium to a-iTrust’s adjusted NAV per unit of S$1.31. We believe the expansion into the modern Indian warehouse sector warrants a premium not only from the boost to a-iTrust’s near-term DPU outlook but more importantly, the ability to accelerate medium-term earnings growth.
• Our confidence in a-iTrust’s ability to execute on its warehouse expansion is due to its Sponsor’s strong track record in the Asian warehouse space.

Untapped land bank.

• Through its bank and pipeline, a-iTrust has to over sqft of floor. Combined with the recent into the Indian which provides for potential pipeline of sqft, a-iTrust has a visible of over the long.
• The ability to on these growth opportunities is also by strong balance.

WHAT’S NEW - Accelerating growth plans

Forward purchase of BlueRidge 3

• Ascendas India Trust (a-iTrust) recently announced that it had into a master with Nalanda Shelter Private (NSPL) Brickmix Developers Private Limited (BDPL) BlueRidge 3, an IT/ITES special economic zone development located in Pune.
• BlueRidge 3 will be over two phases comprising two IT and a cafeteria total net leasable area (NLA) up 1.8m sqft.
• The development is situated in Hinjewadi Phase 1, an established IT cluster and near a-iTrust's existing BlueRidge 2 property. Phase 1 will have an NLA of c.1.4m sqft with Phase 2 at c.0.4m sqft. Construction for Phase 1 is expected to be completed in 1H21 and Phase 2 in 2H23.
• We understand Hinjewadi is one of the prominent micro-markets in Pune, that has c.20% (10m sqft) of total office stock with IT/ITes comprising up to 86% of the office inventory. It is also strategically located near the Mumbai to Pune Highway and has a well-developed social infrastructure and is in close proximity to residential areas. Furthermore, the market is seeing limited new supply with resultant decline in vacancy and rising rents.

Terms of forward agreement

• As part of the agreement for Phase 1 of the project, a-iTrust will:
  1. Provide INR612m (c.S$12.1m) worth of inter-corporate deposits (ICDs) to NPSL which will be used to part repay an existing loan and for outstanding land payments. The ICDs have a tenure of five years with interest to be serviced on a quarterly basis. ICDs are secured through first charge over the land and buildings of the project. The ICDs shall be repaid upon termination of the ICD agreement.
  2. Provide construction funding for Phase 1 of the project by subscribing for Rupee Denominated Off-shore bonds (RDBs) issued in Singapore by NSPL equivalent to INR4,315m (c.S$85.5m). The RDBs have a tenure of 30 years with interest to be serviced on a quarterly basis. RDBs are secured through first charge over the land and buildings of the project. The RDBs will be repaid upon termination of the RDB Agreements, subject to a minimum average maturity period of three years.
  3. Upon obtaining occupancy certificate and post completion of a stabilisation period of 21 months, a-iTrust shall acquire Phase 1 of the project by paying the vendor a top-up consideration of c.INR2,464m (c.S$48.8m) at around 1H23. The total estimated purchase price (including the top-up consideration) is INR7,390m (c.S$146.4m).
• For Phase 2 of the project, a-iTrust will:
  1. Provide construction funding to BDPL amounting to INR1,250m (c.S$24.76m).
  2. Upon obtaining occupancy certificate and post completion of a stabilisation period of 15 months, acquire Phase 2 of the project by paying the vendor a top-up consideration of c.INR1,170m (c.S$23.18m) at around 1H25. The total estimated purchase price (including the top-up consideration) is INR2,420m (c.S$47.94m).

Financial impact

• We expect funding for the acquisition and constructions loans to be sourced through a mix of internal cash, operating cashflow (a-iTrust retains 10% of distributable income for its growth plans) and debt.
• After assuming slightly lower borrowing costs (6.0% versus 6.3-6.4% as we incorporate the impact expected from Fed Funds rate) and on the back of interest income from the construction funding loans, we raised our FY20-22F DPU by 1-5%.
• We have also lifted our DDM-based Target Price to S$1.55 from S$1.40 as we lower our cost of equity assumption to 9.1% from 12.1% previously. We now peg our cost of equity to Singapore risk-free rate of 2.5% with a beta of 0.95x and market return of 9.4%, given the long history of a-iTrust being listed in Singapore. We had previously based our cost of equity estimates based on Indian macro statistics.

Our thoughts

• The forward agreement to acquire BlueRidge 3 is consistent with a-iTrust’s successful strategy of n funding to various developers and subsequent acquisition of buildings upon hitting certain occupancy and rental milestones.
• While this strategy exposes a-iTrust to non-performance by developers, it is mitigated by a-iTrust’s strong track record of leasing and development. If the developer is unable to complete the construction or achieve particular leasing outcomes, a-iTrust has the capability to step in and complete the project and lease the building.
• Therefore, beyond the expected DPU accretion and diversification benefits, we are positive on exposure to the growing Pune market and the further boost to a-iTrust’s medium-term growth profile. Assuming the acquisition of BlueRidge 3, a-iTrust’s portfolio size (including announced acquisitions and developments, forward purchase agreements) will increase by 7% from c.20.2m sqft to 22.0m sqft.
• We continue to like a-iTrust for its robust 10%, 3- year DPU CAGR and decent 6.0% yield. Thus, we maintain our BUY call with a revised Target Price of S$1.55.

Mervin Song CFA DBS Group Research | Derek Tan DBS Research | https://www.dbsvickers.com/ 2019-07-04

SGX Stock Analyst Report BUY MAINTAIN BUY 1.55 UP 1.400