• Ascendas REIT (SGX:A17U)’s 4QFY19 results are in line, if we exclude the impact of the timing difference arising from its recent rights issue. Its well-diversified portfolio (predominantly business park-focused assets) is expected to stay resilient, despite uncertainty arising from US-China trade tensions.
• Our NEUTRAL call with Target Price SGD3.10 is based on valuation grounds (P/BV of ~1.5x) and we recommend investors to buy on dips.

A Stable Outlook

• Despite the challenging industrial space market in Singapore, it recorded a strong +8.8% rental reversion for the quarter, mainly driven by its business and science parks. Its Singapore portfolio occupancy rate, however, dipped 0.9ppt q-o-q to 87.2% due to the lower occupancy rate of its logistics assets.
• Management noted that the overall industrial market seems to be stabilising, barring the oversupply in some specific segments, and guided for a low single-digit rental reversion. Overseas markets (the US and Australia) are expected to fare better, with high-single digit rental reversions and stable portfolio occupancy rates. Additionally, in the US, it has already renewed leases expiring this year – for tenants Carefusion (14.3% of US rental income) and Nike (3.6%).

Two More Asset Divestments to Strengthen Portfolio

• Continuing on its prudent capital recycling approach, Ascendas REIT announced the divestment of two non-core underperforming assets, Wisma Gulab (+6% above book value) and 202 Kallang Bahru (+13% premium to books) for a total of SGD105m. The move will lower its gearing to a shade below 35%, providing ample debt headroom of > SGD1.1bn (assuming a 40% cap) for acquisitions.
• We believe Ascendas REIT could potentially look at sponsor assets in Singapore, and acquire more logistics assets in the UK post further clarity on Brexit.

Asset Enhancements and Redevelopments

• Ascendas REIT announced the redevelopment of iQuest@IBP, Singapore for SGD84.3m. The move will enable it to enhance the plot ratio to 2.4 from 1.4, and build larger floor plates with better amenities to tackle the oversupply in the micro-market. The expected yield-on-cost is > 8%, which is higher than its current portfolio NPI yield.
• It will also be undertaking asset enhancement works on The Capricorn, The Galen in Singapore and 484-490 & 490-500 Great Western Highway, Sydney, Australia for a total of SGD14.4m.

Earnings and Target Price Changes

• We lift FY20-22F DPU by 2-3%, after factoring in contributions from recent acquisitions and its rights issue. Ascendas REIT also changed its FYE to December from March, to align its reporting period with that of CapitaLand (SGX:C31) (BUY, Target Price: SGD4.20).
• Key risks are the Singapore economy entering into a recession, due to the wider impact from the Wuhan Coronavirus outbreak, trade tensions, and fund flows out of the REIT sector.

Source: RHB Invest Research - 3 Feb 2020