2QFY13 DPU in line with expectations. Ascendas REIT (AREIT) reported 2QFY13 DPU of 3.53S'' (+0.4% YoY), equivalent to 25.2% of our FY13 DPU estimate. Revenue and net property income came in at S$143.3m and S$102.9m respectively. The rise in NPI by 13.6% YoY was mainly due to additional contribution of newly acquired properties since September 2011. Going forward, we expect AREIT to register continual growth in DPU, mainly from 1) additional contribution from the new properties acquired and 2) positive rental reversion contributed by low rates due for renewal in the coming quarters. Although the global economical climate continues to remain positive for the REITs sector as a whole, we believe AREIT which is trading at 1.33x P/B and a FY13 forecasted dividend yield of 5.6%, is fairly priced at the moment. In the face of these valuations, we downgrade our call on AREIT to NEUTRAL with a revised DDM based (COE: 7.8%; TGR: 2.0%) TP of S$2.67.

Consolidation of portfolio in the near term. As highlighted by management, given a relatively tight industrial property market in Singapore at the moment, acquisition of good quality industrial properties is becoming more challenging. Going forward, apart from the acquisition of a business park in Jinqiao, Shanghai and the two development projects (Unilever Four Acres and Nexus) in Singapore, AREIT aims to consolidate its portfolio and grow through asset enhancements. Properties in the portfolio to undergo AEIs in the subsequent quarters include 9 Changi South Street 3, Xilin Districentre Building D, Tech Block II, 1 Changi Business Park Ave 1 and 31 Ubi Road 1.

Investors gaining more interest in industrial space. Since the beginning of the year, as the government of Singapore implemented various measures to curb upward pressure on residential properties, interests in industrial properties have gained significantly. Since then, cap rates of this group of properties have been compressed from 6.5-7.3% in 1Q12 to the current 6.0-6.5%. Going forward, we expect industrial properties to remain stable despite a slowdown in Singapore's economy.

Fairly valued at this moment. Going forward, although we believe REITs as a sector would continue to benefit on the back of high liquidity, prolonged low interest rate environment and a strong Singapore currency; we believe AREIT is currently fair valued at the moment as it trades at 1.33x P/B with a forecasted FY13 dividend yield of 5.6%. At this juncture, we downgrade our call on AREIT to NEUTRAL with a revised TP of S$2.67.

DMG & Partners Securities Pte Ltd may have received compensation from the company(s) covered in this report for its corporate finance or its dealing activities; this report is therefore classified as a non-independent report. Please refer to important disclosures at the end of this publication.

Currently trading at 4.5% spread to 10-year bond yield. AREIT is currently trading at 4.5% spread to 10-year bond yield which is 149Bps above its pre-crisis mean spread (3.0%) based on FY13 DPU. Our TP of S$2.670 translates to a spread of 2.9%.

DMG & Partners Securities Pte Ltd may have received compensation from the company(s) covered in this report for its corporate finance or its dealing activities; this report is therefore classified as a non-independent report. Please refer to important disclosures at the end of this publication.

Source: OSK