Ascendas REIT - CGS-CIMB Research 2019-10-10: Rejuvenation In The Works But Not A Bargain


Ascendas REIT - Rejuvenation In The Works But Not A Bargain

  • ASCENDAS REIT (SGX:A17U)’s growth profile remains visible thanks to its portfolio rejuvenation but valuations, which are at most recent peak levels in 2013, are expensive.
  • We incorporate potential accretive acquisitions from new sponsor – base case scenario of S$500m at 5.5% yield and 40:60 debt equity funding ratio.
  • We maintain our HOLD call with a higher Target Price of S$3.12.

Revitalising the portfolio but valuations are demanding

  • We think ASCENDAS REIT (SGX:A17U)’s portfolio rejuvenation plans and its development project for Grab could boost distributable income upon completion.
  • While we are positive on Ascendas REIT due to its dominant market position and visible growth profile, we think valuations are expensive (5.3% yield and 1.4x P/BV vs. +2 S.D. of 5.3% and 1.37x respectively) and investors could look for a lower entry point.
  • Recent peak valuations of 5.2% yield were last seen in 2013 when the sentiment was more positive with positive rental reversions of 9.6-18.5%; in contrast, Ascendas REIT has guided for flattish rental growth for 2019. See Ascendas REIT share price.
  • Since 2013, Ascendas REIT’s AUM is up c.60% (from S$7bn to S$11.2bn) implying acquisitions have to be larger to move the needle for Ascendas REIT’s inorganic DPU growth. See Ascendas REIT dividend history.

Acquisitions from new sponsor priced in

  • The completion of CAPITALAND LIMITED (SGX:C31)’s (Rating: Add, Target Price: S$4.15, see report: CapitaLand - Focused On Execution) acquisition of Ascendas Pte Ltd and Singbridge Pte Ltd could speed up the injection of assets into Ascendas REIT. We think Ascendas REIT would be a natural vehicle for the sponsor’s industrial property assets due to their complementary nature with Ascendas REIT’s existing assets within the same vicinity. We thus price in S$500m of acquisitions from the sponsor at 5.5% yield and 40:60 debt equity funding ratio.

Accretive acquisition Down Under improves income stability

  • Ascendas REIT announced the acquisition of 254 Wellington Road for A$110.9m. The 17,507 sq m suburban office building in Melbourne is expected to be completed in 2Q20. It is 65.2% pre-committed for 10 years by Nissan Motor Co. with a rental escalation of 3.0% p.a. The vendor will provide a 3-year rental guarantee for the remaining vacant space after which the NPI yield for the first year would be 5.7% post-transaction costs. See Ascendas REIT's announcements.
  • Post-acquisition, the WALE for Ascendas REIT’s Australian portfolio is lengthened from 4.3 years pre-acquisition to 4.5 years. Funding will be via debt and internal resources and will provide a 0.014 Scts uplift to FY18/19 DPU on a pro-forma basis, according to Ascendas REIT.

Maintain HOLD with a higher Target Price of S$3.12

  • We update our model to reflect the change in year end from Mar to Dec; FY19 reflects the 9-month period ending 31 Dec 2019. We account for the acquisitions/divestments and update our forex assumptions; accordingly, our DDM-based Target Price rises to S$3.12.
  • Downside risks to our call include a slower recovery of industrial rents while upside risks could come in the form of more accretive acquisitions.

LOCK Mun Yee CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | https://www.cgs-cimb.com 2019-10-10
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.12 UP 3.080