• Keep BUY and SGD3.20 TP (15% upside), c.6% yield. CapitaLand Ascendas REIT’s latest divestment at a hefty premium is positive and reflects hidden upside potential across its Singapore assets. Another near-term opportunity to unlock value in its Singapore data centre (DC) assets could arise from its top tenant Singtel (ST SP, BUY, TP: SGD3.50) likely vacating its space upon lease expiry in the coming years. With CLAR’s comfortable balance sheet position, we see room for acquisitions. We also see potential valuation uplift for its overseas assets from the ongoing rate cuts.

• The divestment of 21 Jalan Buroh, Singapore for SGD113m represents a 67% premium over the latest (July) independent valuation, and translates to an exit net property income (NPI) yield (FY23) of 4%. The fully occupied property is a 3-storey ramp-up warehouse with a 7-storey ancillary office block, and has a balance 31-year land lease tenure. Media sources have identified Shanghai-based GDS Holdings as the buyer that intends to build a DC in the location, to be operational by 4Q26. The divestment underscores potential hidden value in some of CLAR’s assets, with its other industrial assets in Tai Seng and the Ubi cluster possibly offering such redevelopment uplifts and opportunities in the future.

• Potential to redevelop other Singapore DC assets. Singtel, CLAR’s largest tenant (3.4% of monthly gross revenue as of June) has presence across three of CLAR’s Singapore DC assets – Telepark, Kim Chuan Telecommunication Complex (KCTC), and 38A Kim Chuan Road. CLAR acquired Telepark and KCTC in 2005 with a 20-year lease term. Based on our channel checks, Singtel is unlikely to renew the leases upon expiry, as it plans to consolidate operations in its new modern DCs to better suit its growing DC needs. We understand from CLAR that the leases have since been restructured, and expiries are staggered and unlikely to significantly impact earnings. We think the tenant exit could provide a good opportunity to upgrade or redevelop these assets into more modern facilities and benefit from greater DC demand in Singapore with <2% overall market vacancy.

• Gearing is comfortable at 37.4% (post divestment), presenting c.SGD500m debt headroom before hitting c.40% levels. CLAR is currently in active discussion for the redevelopment of Welwyn Garden City, UK, a DC asset with a significant increase in power capacity (c.60MW). We think this is likely to materialise, considering the UK Government’s push to build more DCs.

• No changes to estimates. CLAR has one of the highest ESG scores (3.4 out of 4.0) among Singapore REITS due to its consistent green initiatives, and therefore, our TP includes a 6% ESG premium.

Source: RHB Research - 16 Oct 2024