Ascendas Reit

DBS VICKERS SECURITIES on 18 Oct 2012

ASCENDAS Reit (A-Reit) reported 18 per cent and 14 per cent y-o-y growth in topline and net property income to $143.3 million and $102.9 million respectively. The strong performance was due to additional rental income from its recently completed acquisitions and development projects, supported by positive underlying organic growth (circa +5 per cent y-o-y). Distributable income came in at $79.1 million (+16 per cent y-o-y), translating to a DPU (distribution per unit) of 3.53 Singapore cents (+6 per cent y-o-y). Sequential performance was relatively stable. At half-time, A-Reit delivered a DPU of 7.06 Singapore cents, forming 51 per cent of our full-year forecast.

Operationally, average occupancy levels continue to remain stable at 96.6 per cent while rental reversions remained healthy at 12.8 per cent (versus 11.6 per cent in Q1 2013) compared to previously contracted rates. We expect A-Reit's operational performance in the coming quarters to remain steady, cushioned by expiring rental rates that are 18-52 per cent below current market levels.

A-Reit unveiled a further two asset enhancement works at Ultro Building and Aztech Building, costing $19 million. These two AEI (asset enhancement initiative) works are expected to deliver strong returns given current low passing rents that are circa 40-100 per cent below market levels. While earnings impact is unlikely to be significant, this together with its other investments totalling $450 million ($235.2 million yet to be funded), are expected to deliver a steady growth profile of 2-3 per cent per annum as these projects are progressively completed over H2 FY13-FY14.

A-Reit had issued $300 million worth of collaterised securities in 2010, with a conversion price of circa $2.27 and is currently in the money. We understand that the manager has not received any conversion notice and we have not factored this in our estimates. However, we estimate a circa 5 per cent dilution to our forecasts (circa FY14 forecast yield will decline to 5.4 per cent) if 100 per cent conversion is assumed.

A-Reit has been a prime beneficiary for yield-hungry capital markets in recent times. In our view, valuations appear rich at prospective FY13-14 forecast yields of 5.6-5.7 per cent and P/BV (price-to-book value) ratio of 1.3x. Implied cap rate of 5.0 per cent, in our view, appears to be pricing in too much growth than we believe it can achieve given its sizeable and mature portfolio. "Hold" call maintained, target price $2.24 based on DCF (discounted cash flow).

HOLD