AREIT – Kim Eng

Ascendas REIT – Company update (Anni KUM, DID: 6432 1470)

Previous Day Closing price: $1.92

Recommendation: HOLD (maintained)

Target price: $2.03 (upgraded from $2.02)

A-REIT is acquiring two properties for S$131m, which could contribute to revenue from FY11 (starting Apr-10). We estimate the impact on DPU to be marginal. A-REIT also plans to acquire a property under development in Jurong for $97.5m in 2011/2012. Overall, the scale of the transactions is not surprising, though we are quite positive on the quality of the deals. Gearing will still be at a comfortable 33.6%. We maintain Hold due to limited upside to price target of $2.03. Forward yield of 6.6% provides support.

Marginal impact on DPU

A-REIT has proposed to acquire two properties for S$131m. The acquisition is expected to be completed by Apr-10. Separately, it signed a MOU to purchase a property under development in Jurong that is expected to be completed in 2011/2012, for S$97.5m. The total value accounts for
4.7% of A-REIT’s entire portfolio value. The near-term impact on DPU is marginal, with accretion of 0.01-0.05 cts for FY11-12F.

Adding two blue-chip tenants into its stable

The most significant of these properties is DBS Asia Hub at Changi Business Park, to be acquired from its sponsor, Ascendas, for S$116m. Completed in Sep-09, it is 100%-leased to DBS for 10 years with annual escalation and renewal options. The second property, 31 Joo Koon Circle, (Light Industrial segment) will be leased by Flextronics in a sale-and-leaseback arrangement for 5 years.

Room for growth

Though it was announced that the acquisitions will be funded by proceeds from the private placements in Aug-09, we have assumed 100% debt-financing, as there is ample room to gear up. As such, gearing could increase from 31.2% to 33.6%. Our revenue forecast has been raised marginally by 2.2% for FY11. Revenue contribution would increase due to the built-in annual rental escalation.

Near-term upside capped by rich valuations

The scale of the acquisition is in line with previous guidance and we are quite positive about the quality of the target assets. With the additions, A-REIT’s properties will increase to 93 (total GFA 3m sqf). A-REIT offers a forward yield of 6.6%. With limited price upside, we maintain Hold with price target of $2.03 (prev. $2.02).