A-REIT – OCBC
An undeniable leader in industrial space
Strong asset portfolio. Ascendas REIT (A-REIT) is Singapore’s first and largest business space and industrial REIT, with a portfolio of 90 properties and book value of about S$4.7 billion. The key strength of A-REIT lies in its strong asset portfolio. We like A-REIT for its balance exposure to different groups of industrial properties, balance mix of single and multi-tenanted properties and diversified base of quality tenants.
Growth via property development. A-REIT’s expertise and engagement in industrial property development can also enhance shareholder value and further strengthen its asset portfolio. With just one ongoing development project at the moment, this leaves A-REIT with significant headroom of S$280.6m for new development projects.
Limited impact from negative rental reversions. Even though some of AREIT’s assets could face negative rental reversions going forward, we believe that the impact on its portfolio as a whole would not be significant because the NLA of expiring leases is small compared to the total NLA of A-REIT’s portfolio and the average existing rents of these expiring leases are not significantly higher than current market rents.
Gearing level remains comfortable. Its balance sheet has been strengthened after two fund raising exercises this year. A-REIT successfully lowered its gearing level to 30.5% at the end of Sep 2009. The current gearing ratio provides a comfortable buffer from management’s target gearing ratio of 40%.
DPU to fall due to placement dilution. We expect A-REIT to deliver DPU of 12.86 S-cents for FY09/10. This is 15.3% lower than the FY08/09 DPU due to the dilution impact from the two placement exercises in 2009. For FY10/11, we expect DPU to remain steady and turn in marginal growth of 0.3% YoY to 12.9 S-cents. These translate to DPU yields of 6.84% and 6.86% for FY09/10 and FY10/11, respectively.
Re-initiate A-REIT with HOLD; fair value estimate of S$1.76. We derive a fair value estimate of S$1.76 for A-REIT, which is pegged at par to our RNAV estimate. We like A-REIT for its stable dividend yield, diversified tenant base, long term leases and property development capability. Nevertheless, we reinitiate coverage on A-REIT with a HOLD rating on valuation ground. We advise investors to accumulate A-REIT at more attractive price levels around the range of S$1.60 to S$1.70.