• Maintain NEUTRAL, Target Price raised to SGD3.00, from SGD2.90, 4% downside with 5% yield.
• Ascendas REIT’s recent acquisition of an Australian suburban office, although it slightly increases the forex risks, is in-line with its diversification strategy of adding more freehold assets, with long WALE to provide income stability.
• Ascendas REIT's valuation at 1.5x P/BV FY19 (Mar) looks rich, considering the challenging industrial market conditions in Singapore. We recommend investors to wait for a pullback.

Accretive Acquisition of 254WR

• Last week, Ascendas REIT (SGX:A17U) announced the acquisition of 254 Wellington Road (254WR) in Melbourne for AUD110.9m (SGD 104.4m) at par with valuation and an NPI yield of 5.8%. See Ascendas REIT's announcements. Assuming a 60:40 equity-debt mix, the deal will be marginally accretive to its pro-forma FY19 DPU.
• Nissan will be the anchor tenant (occupying 65% of space) for 10 years, with the vendor providing 3-year rental guarantee for the remaining space. The leases also have a built-in rent escalation of 3% pa. The property, which is under construction, is expected to be completed by 2Q 2020.
• Post-acquisition, Australia will account for 15% of its portfolio (from 14%) with Singapore at 78% accounting for the bulk and the UK with 7%. Gearing post acquisition is expected to raise marginally to 38%, still leaving a debt headroom of SGD0.4bn for acquisitions (assuming 40% gearing levels).

SG Industrial Sector Facing Some Headwinds From Slowing Demand

• Singapore’s September Purchasing Managers' Index (PMI) reading of 49.5 (-0.4ppt m-o-m), indicates a contraction in the manufacturing activity and is the weakest reading in more than three years. The weakening industrial demand comes on the back of increasing trade tensions and a prolonged uncertain environment.
• Our discussions with industrial landlords also indicate that tenants have largely become cautious, with some downsizing pressure. While the industrial sector supply is expected to see some slowdown from 2020, the challenging demand outlook is likely to keep pressure on rents.
• About 30% of Ascendas REIT's leases are due for renewal in FY19-20F for which we expect flattish rental reversions.

Synergies From CapitaLand Group

• With the Ascendas REIT now being part of the larger CapitaLand (SGX:C31) group, management noted that it would tap in CapitaLand’s retail expertise to increase retail options for its business parks thus enhancing its vibrancy and assets value. We believe Ascendas REIT could also potentially leverage on the group to lower its interest cost further.

DPU and TP Adjustments

• We have fine-tuned our FY21-22F DPU lower by 1-2% factoring in a slightly lower rental growth for the SG portfolio. We have also lowered our COE by 20bps to 7% to better reflect a prolonged low interest rate environment.
• Ascendas REIT will also be changing its reporting year-end to December from March by the end of this year, thus aligning it with CapitaLand’s. We haven’t yet factored this change in our model. See Ascendas REIT's share price; Ascendas REIT's dividend history.

Source: RHB Invest Research - 10 Oct 2019