Ascendas India Trust - DBS Research 2020-07-29: Sprinting ahead of its S-REIT peers; Waiting To Pounce On The Right Opportunity


Ascendas India Trust - Waiting To Pounce On The Right Opportunity

  • Robust 24% rise in Ascendas India Trust's 1H20 DPU; in line with estimates.
  • Ample debt headroom of over S$1.1b to complete its committed forward purchases and developments.
  • Organic growth remains robust with positive reversions anticipated.

Sprinting ahead of its S-REIT peers.

  • We maintain our BUY call on Ascendas India Trust (SGX:CY6U) with Target Price maintained at S$1.85, implying 1.25x P/adjusted NAV.
  • Despite the COVID-19 outbreak, collections remain high and we believe Ascendas India Trust remains on an inorganic growth track to drive a robust 10% CAGR in DPU in the next 2 years. The Manager is also considering investing in the datacenter space, to leverage on the growth of the IT sector in India.

Waiting to pounce on the right opportunity

Ascendas India Trust's 1H20 DPU jumps 24% y-o-y to 4.64 Scts.

  • Despite the lockdown in India in 2Q20, Ascendas India Trust reported a robust 24% rise in DPU to 4.64 Scts (90% payout policy), which is 50% of our full year forecast. This is on the back of 1% y-o-y growth in net property income (NPI) to S$73.5m and 26% y-o-y rise in interest income (or coupons) from their various forward purchase agreements (Arshiya Panvel, AURUM IT SEZ, aVance 5 & 6 and BlueRidge3).
  • Ascendas India Trust's DPU was also boosted by the reversal of dividend distribution tax (DDT) and Minimum Alternate Tax (MAT) in 1H20 and higher provision of Singapore GST in 1H19.
  • We highlight that NPI rose by 1% despite higher provision of doubtful debts in 1H20, which we remain hopeful will be collected in 2H20. This mainly came from its office leases where payments have been less prompt. That said, it forms a manageable 3% of revenues for 1H20.

Commendable performance despite stress in the operating environment.

  • Ascendas India Trust's portfolio occupancy rates have remained high at a committed rate of c.98%, but slightly lower compared to 1QFY20. This came mainly from a dip in occupancy rates at IT Park Chennai (ITPC) (97%, - 1 ppt q-o-q), IT Park Bangalore (ITPB) (98%, - 1 ppt q-o-q), CyberPearl (96%, -4 ppt q-o-q).
  • The lock-down in India has had an adverse impact on tenants within the F&B sector. Reliefs have been rendered to those tenants during the period of lockdown, but they contribute less than 1% of revenues.
  • Looking ahead, the Manager has brought expiries down to 8% of NLA (vs 12% a quarter ago) with positive rental reversions. A majority were in Chennai, a market with robust demand-supply fundamentals. The Manager believes that
    1. Ascendas India Trust is unlikely to see negative rental reversions given the wide spreads over passing rents in recent transactions, and
    2. retention rates will remain high.
  • While leasing spread (transacted rents over expiring rents) has ranged between c.9% and 37% over the past 12 months, we see this as a buffer that the Manager can offer tenants to retain them without impacting contributions negatively.
  • Collections have remained high at 99% (April-20), 95% (May’20) and 92% (Jun’20), we understand that the manager has conservatively provided for slow paying tenants, in case they remain slow paying. That said, rental deposits of up to 3months of rents is a cushion to earnings downside.

Ample liquidity and funding sources.

  • Ascendas India Trust has refinanced a large part of its debt expiring in FY2020 with undrawn committed 4-year/5-year term loan facilities totalling S$69m. It is in the process of closing at S$65m term loan to refinance c.S$134m of debt expiring in FY20.
  • 65% of Ascendas India Trust's debt is in INR with 35% in SGD.
  • Financial metrics remain stable: ICR (YTD FY20) of 4.0x; 82% of its debt fixed with an effective cost of debt of 5.7%.
  • Gearing remains low at 29% (vs 50% MAS limit) with ample headroom of up to S$1.1bn to fund its development activities or potential acquisitions.

Our view and recommendation:

Ascendas India Trust – a play on the future of real estate – IT Parks, Warehouses and (potentially) Datacenters.

  • We remain excited on the myriad of growth opportunities available for Ascendas India Trust to capitalise on. With organic growth on an upward trend coupled with a robust balance sheet (low gearing of < 30% with debt funded capacity of S$1.1bn to 50% limit), Ascendas India Trust remains on the hunt for growth drivers.
  • The Manager alluded to looking at adding another leg of growth within the datacenter space in India, which will complete the trio of future-ready real estate assets including IT Business Parks and warehouses. Opportunities may come from a potential collaboration with Sponsor CapitaLand.

Development project in ITPB – contributing from 1Q21 (s light delay).

  • The 0.68m sqft development project in Bangalore for TCS, 100% pre-leased prior to completion will likely be delayed and only completed in 1Q2021 (vs 2H2020 previously) due to construction delays.
  • The stickiness of demand from TCS stems from the end tenant consolidating its operations from older properties to this new property in IT Park Bangalore (ITPB).
  • We had projected the project to start contributing from 2H2020.
  • Our earnings projections from this project has been pushed back by one quarter to 1Q21.

Potential project in Bangalore – re-visiting terms before completing this deal.

  • The Manager had previously highlighted about a potential forward purchase agreement in Bangalore for INR 17bn. The project is in the due diligence stage for now and there could be a delay in completing this deal given the change in operating outlook post COVID-19; terms of the deal likely to be revisited with the change in the operating climate within the micro market.
  • We have priced in contribution from this deal from 1QFY21.

Forward purchases – on track for drawdown

  • The Manager has a robust pipeline of forward purchase agreements with various vendors to fund the construction and acquire the projects upon completion, subject to achieving mutually agreed pre-leasing milestones.
  • As of 31 March 2020, the Manager has S$987m worth of development projects across 10 such projects, with S$315m disbursed and another S$692m to be disbursed in stages over the next few years.
  • With a majority of these projects completing from FY2021 onwards, we keep our estimates intact for now.

Where we differ: Above-consensus growth.

Derek TAN DBS Group Research | Dale LAI DBS Research | https://www.dbsvickers.com/ 2020-07-29
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