Last Tuesday, Macquarie Equities Research (MER) upgraded their recommendation on Ascendas REIT (AREIT) from ‘Neutral’ to ‘Outperform in view of their forecasted 23% total return post the stock’s 3-mth correction of 14% (vs. the FSSTI Index’s fall of 5%). MER also has a 12-month price target of $2.60 on the stock.

Attractive valuations on all metrics
AREIT is trading at FY14 yield of 6.6%, undemanding vs. its 10-yr mean (ex. GFC) of 6.4%. Existing yield spread of 425bps is a shade below historical levels of 380bps. Price to Book value (P/B) of 1.16x also appears unjustifiable compared to mean of 1.36x, as cap rates are likely to remain unchanged at 6.6%, with single-digit positive rent reversions expected in FY14.

Sponsor pipeline could increase distribution per unit (DPU) by 2%
As of 31 Mar 2012,sponsor - Ascendas Land’s AUM stood at S$12.9b, of which 59% is attributable to Singapore. In line with management’s guidance, MER believes AREIT is more likely to acquire the business/science parks component, of which 8 are completed and 6 under development. On MER’s estimates, the completed assets are worth S$637.5m assuming 6.1% cap rate and spot rent of S$3.80 psf/mth. On MER’s estimated net property income (NPI) yield of 6.8% and 40% debt funding, it could add 1.9% (or 0.28 S cts) to FY14 DPU and increase asset base by 9.9% to S$7.1b. Present gearing of 28.3% implies debt headroom of circa S$0.7–1.4b for new acquisitions before reaching 35–40%.

Under-rented portfolio ensures positive rent reversion
FY14 will see the expiry of 21.4% of leases (by gross rental income), which are well-balanced between its various asset classes. However, as AREIT’s passing rents are 8-26% lower than spot rents, this should ensure healthy rent reversions.

MER’s action and recommendation
AREIT continues to be the dominant player within Singapore’s industrial property sector given its portfolio of 103 properties across various industrial asset classes and proven development expertise. MER is advising its institutional investors that the recent 14% share price correction provides a good entry point for investors who like its defensive and resilient income streams.

Source: Macquarie Research - 9 Jul 2013