A-REIT : OCBC

Focus on asset size guidance

DPU growth likely to slow. Ascendas REIT (AREIT) will report its 4Q07 results on 18th April after market closes. We are expecting AREIT to report 4Q07 DPU of 3.45 cents, giving full year DPU of 12.90 cents. While FY DPU growth is about 10.3%, this is less than half of the 21.9% growth in FY06. This slowdown is best seen on a sequential basis, with DPU growth of about 7.8%. The growth deceleration reflects the slower rate of acquisition compared to previous years and at much lower yields from the assets bought.

Keep an eye on guidance for acquisition in FY08. As AREIT’s earnings growth has been on the back of acquisition of domestic assets, the key issue is whether the slower pace of acquisition is a one-off or a structural slowdown. Over the last few years, AREIT’s asset size has grown fairly large. It grew by about S$420m in FY04, by S$1000m in FY05 and by S$656m in FY06. For FY07, AREIT is likely to report that it has achieved about S$500m of acquisitions. For the FY07 results, the key would be to focus on management’s guidance (if any) of expected acquisition in FY08.

Market competition is intensifying. The market is definitely getting more competitive. Presently, there are three industrial REIT players in the market, i.e. AREIT, Mapletree Logistics Trust and Cambridge Industrial Trust. A fourth player, MacarthurCook Industrial REIT, is currently being offered and JTC REIT could be listed in 2008. Growth strategies vary very little among the industrial REIT players. They all adopt the same acquisition led growth strategy. Hence we do not anticipate competitive pressures to buy assets and grow earnings to get any easier.

Maintain HOLD. The key worry is AREIT’s high price-to-book ratio of about 1.7 times. This implies that the market continues to believe that rapid growth is still possible. With the industrial REIT space getting very crowded, we see a high probability of disappointment. Hence AREIT has to either moderate expectation or alternatively propose a new approach to growth. There are a few possibilities, one is to venture overseas and another is to try to buy out a rival REIT that is trading at a much higher yield. We value AREIT at S$2.31 based on an asset size of S$4.0bn (S$2.9bn as at 3Q07). We maintain our HOLD rating.