Ascendas REIT – Not as grim as it looks August 2, 2019 2053

PSR Recommendation: ACCUMULATE Status: Upgraded
Last Close Price: S$2.81 Target Price: S$3.310
  • 4Q19 and FY19 NPI and DPU were in line with our forecast.
  • A gloomy manufacturing outlook but a slight improvement in SG operations – <10% of FY19 lease expiries, tenant diversification and portfolio asset mix will keep AREIT buffered.
  • Temporary weakness in Australian occupancy
  • Change in financial year-end from 31 March to 31 December
  • Upgrade to ACCUMULATE with a higher target price of $3.31 due to lower interest rate assumptions and higher revenues forecasts from the signing of above-market rents.

 

The Positives

  • Singapore recorded improvement in occupancy (+0.6ppts) and positive rental reversions (+2.7%). Operationally, AREIT’s SG operations outperformed with revenue/NPI growing 1.5%/9.4% respectively. This is despite the management guiding for flattish rental reversions and average passing rents expiring above-market rents. Demand for new spaces was driven by the transport and storage sector, accounting for 28.9% of 1Q19’s GRI. Positive reversions from all segments except integrated developments, which was flat. Positive rental reversions were on leases with average passing rents above the market rent, which implies that AREIT has on average been able to secure leases with above-market rentals.
  • Largely unaffected by the grim manufacturing outlook. The Electronics category has been flagged as the worst performer in terms of Non-Oil Domestic Exports (NODX) (May19/Jun19 -31.6%/-31.9%). However, we consider the merits of AREIT’s diversification – customer base of 1,350 tenants, of which 6.4% are in the Electronics sector – and assess that AREIT’s exposure to the Electronics sector is contained. Figure 1 shows the breakdown of Singapore-sourced NPI by industrial sub-type. 64.4% of NPI is from Business & Science Parks and Hi-Spec Industrial assets, which have comparatively higher demand versus other industrial sub-categories.

 

The Negatives

  • Portfolio occupancy declined 80bps QoQ to 91.1%, dragged down by lower occupancy in Australia (-5.7ppts). This was due to non-renewals. The largest non-renewal in 1Q19, 94 Lenore Drive, has since been leased out and the new tenant will commence its five-year lease from July 2019.
  • AREIT’s SG portfolio occupancy (88.9%) is below the industry average (89.3%) despite improvement in occupancy. However, we note that the high proportion of single-tenant buildings in the larger market, in comparison to AREIT’s portfolio, helped to bolster island-wide occupancy.

 

Change in financial year-end from 31 March to 31 December

The current financial year is nine months from 1 April 2019 to 31 December 2019 (“FY2019”). Regular distributions to Unitholders of AREIT shall be for the six months ended 30 September 2019 and three-month period ended 31 December 2019. Thereafter, the regular distributions shall be made on a semi-annual basis for every six months ending 30 June and 31 December each year.

 

Outlook

Divestment of No. 8 Loyang Way 1 (Light Industrial) for S$27.0m at 14.4% premium to market value and 8.0% premium to purchase price is expected to be completed in 2Q19.

Businesses are likely to remain cautious given the weak manufacturing sector outlook and slowing GDP growth in Singapore. However, the future is not as bleak for AREIT given their low expiries of 9.3% of SG GRI for FY19 (FY20 19.7%). Industry occupancy has held steady at 89.3% for the past two quarters and the new supply of industrial space coming on to the market in FY19/20 (which represents 1.6%/3.6% of existing supply) is already 90%/39% pre-committed. This should provide industrial rents support amidst the softer economic outlook.

 

Upgrade to ACCUMULATE with a higher target price of $3.31 (prev $2.88).

Our higher target price is mainly due to the lower interest rate assumption and higher revenues forecasts from the persistent signing of above-market rents. Lower cost of equity of 6.6% has been applied in our DDM calculations (prev. 6.9%).

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