• Downgrade to HOLD from Add due to high valuations at > +2 s.d. above historical average with a slightly higher DDM-based Target Price of S$2.87.
• We think that the market could be over-optimistic on the recovery of the industrial market as rental reversions are only expected to be flat.
• ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)'s 4Q/FY19 DPU of 4.148/16.035 Scts was in line at 26%/100% of our forecasts due to contributions from new acquisitions and completed redevelopments.

Downgrade to HOLD From Add With a Target Price of S$2.87

• We downgrade Ascendas REIT to HOLD due to high valuations of 1.4x P/BV and 5.4% yield which are > +2 s.d. above historical average (historical average of 1.2x and 6.3%, respectively). The last time Ascendas REIT traded at such lofty valuations was in 2013 in a more optimistic rental growth environment with rental reversions of 9.6%-18.5%.
• Given the more muted environment currently, we do not think that Ascendas REIT should command such premium valuations.
• Our FY20-22F EPS estimates are tweaked to account for the updated occupancy and asset values. We also lower our risk-free and terminal growth rates due to a more dovish interest rate outlook.
• Further de-rating catalyst could be a decline in rents while upside risk could be accretive acquisitions.

Rental Reversions Expected to be Flat in the Coming Year

• Despite positive rental reversions of 3.7% and 6.6% for leases renewed in FY19 and 4Q19 respectively, Ascendas REIT expects this to be flat in FY20 due to global uncertainties and the large upcoming supply of industrial properties in Singapore. As a result of trade war uncertainties and a slowdown in growth expectations, tenants continue to be cautious and take a wait-and-see approach to leasing.

AEIs Come Into Focus

• Ascendas REIT has announced the redevelopment of 25 & 27 Ubi Road 4 for S$35m which is expected to be completed in FY22 to convert the two existing light industrial buildings into a single high-specification building. While this has not been factored into our forecasts, management expects a 7.5-8.0% ROI from an uptick in rents upon the completion of the redevelopment.
• An additional S$21.5m worth of asset enhancement initiatives (AEIs) was announced at four properties to upgrade specifications and rejuvenate the properties.

Ascendas REIT's 4Q/FY19 DPU in Line at 26%/100% of Our Forecasts

• Ascendas REIT's 4Q19 DPU of 4.148 Scts (+3.8% q-o-q) was in line and formed 26% of our FY19 forecasts due to lower utilities income and higher property tax during the quarter. This was offset by a one-off distribution of a rollover adjustment of S$7.8m.
• FY19 DPU of 16.035 Scts (+0.3% y-o-y) made up 100% of our FY19 forecasts due to contributions from UK & Australian acquisitions and redeveloped Singapore properties. This was offset by higher operating expenses attributed to the new acquisitions and an enlarged unit base.
• Overall occupancy and gearing improved to 91.9% (91.3% in 3Q19) and 36.3% (36.7% in 3Q19).

Source: CGS-CIMB Research - 29 Apr 2019