A-REIT – Nomura

Valuation risks remain

• Industrial valuers seemingly upbeat on asset values

Based on recent market valuations Ascendas REIT is unlikely to post marked changes in underlying asset values in its forthcoming 4Q10 results (April 2009), underscoring its low gearing of 0.31x. On our numbers, A-REIT’s valuation of its Singapore portfolio at cap rates of 7.0-7.25% seems modestly conservative in light of Mapletree Logistic Trust’s recent revaluation for its predominantly Singapore logistics portfolio at 6.5%. Notwithstanding broader market risks, we have trimmed our portfolio cap rate assumption by 50bp to reflect valuers’ more upbeat assessment of the industrial sector amid stabilising asset values. The 50bp decline in cap rates as well as marginal adjustments to the underlying achieved rents (following its 3Q FY10 results) sees our asset valuation rising by 12.3% (equivalent to S$0.26/unit, which flows directly to our intrinsic NAV, which is revised to S$1.66/unit from S$1.39/unit).

• Risks remain in the industrial sector

We still envisage risks in the industrial market — weakening demand and risks of negative reversions following a 29.2% y-y decline in industrial rents over the course of 2009 (according to Jones Lang La Salle) as warehouse vacancy rises to 10.0%.

• Price target revised to S$1.66; maintain REDUCE

A 50bp cut in our portfolio cap rate assumption resulted in a 10.5% increase in our gross asset valuations. Following adjustments to our model to reflect marginally higher net income as a consequence of lower operating expenses, our FY10 DPU forecast is raised to S¢13.4 versus S¢12.5 previously, delivering a FY10 yield of 6.9%. Our intrinsic NAV rises to S$1.66/share, although valuations prompt us to retain our REDUCE call.