Small but still beautiful

Story: Ascendas India Trust (AiT) announced that they have entered into a sale deed to acquire 96,051.88 sqft of office space in ITPB from Tata Consultancy Services (TCS) for a consideration of Rs 307.8m (S$9.8m). This space has been leased back to TCS concurrently.

Point: The completion of the sale will increase AiT’s ITPB space by 6% to 1.8m sq ft and 2% to its total portfolio. The acquisition is to be funded by debt ( SOR + 70 bps) and is expected to be immediately accretive to current unitholders when completed. As such, we have adjusted our forward DPU estimates in FY09 and FY10 by 0.5% and 1.4% respectively to 6.9cts and 7.7 cts. Moving forward, AiT is currently engaged in the development of 1.5m sqft of SBA (3 buildings) in ITPB and ITPC. Apart form this, further upward earnings surprise hinges on the execution of its (i) two ROFR with Ascendas Land Int and Ascendas India Devt Trust, (ii) 3rd party acquisition opportunities, and (iii) further development of 2.7m sqft SEZ in Bangalore. The above has not been factored in our forecasts.

Relevance: Maintain BUY, TP adjusted to S$0.91 (Previously $1.01). We have chosen to value AiT based on its existing asset portfolio & planned developments, removing valuation attributed to AiT’s future development of its 2.7m sqft SEZ in Bangalore (+S$0.10). AiT is currently trading at a FY09-10 DPU yield of 9.4% – 10.5%. Key risk to our forecast will derive mainly from execution delays from the development of its 1.5m sqft of SBA.

Ascendas India Trust Q1 distributable income up 12%

ASCENDAS India Trust has reported distributable income of $12.4 million for its first quarter ended June 30, 2008, up 12 per cent from a year ago.

This translates into a distribution per unit (DPU) of 1.65 cents for the quarter, which represented an annualised yield of 8.3 per cent over the closing price of 79.5 cents of the units on July 22, 2008.

Total property income was $28.6 million, which is 23 per cent higher than the year-ago period. Net property income was $16.0 million or 20 per cent higher.

The trust said demand for its portfolio of 4.7 million sq ft of space, and hence its income stream, remained stable. The two buildings which were completed in the last half year have contributed to the bottom line, and will continue to do so as the building operations stabilise and margins further improve.

It said its high quality IT Parks continue to enjoy rental growth and high occupancy, and are well placed to weather market uncertainties due to a diversified and well-constructed income stream.

1QFY09 results in line

Story: Ascendas India Trust (AiT)’s 1QFY09 results were within expectation. Gross revenue and net property income grew 23% and 20% y-o-y to S$28.6m and S$16m respectively. Distribution income of S$12.4m, translates into 1.65 cts DPU.

Point: Gross revenues and NPI were boosted by (i) recently completed additions; Vega at The V and Crest at ITPC, and (ii) higher portfolio occupancy of 97% from new tenant sign-ups, and (iii) higher than average rentals secured for c. 150,000 sq ft of its space. Moving forward, AiT has lined up a further 1.5m sq ft of SBA to be constructed over the next two years. Taking into account a possible delay in rental contribution from these spaces, we lowered DPU by 20.6% for FY09F to 6.9 cts and by 22.6% for FY10F to 7.6 cts. This adjustment is due to a staggered rental contribution post completion of these buildings.

DPU growth will be largely organic in the near term, with 38% of its portfolio up for renewal in FY09-10. The development potential of 2.7m sq ft of SBA, largely within a SEZ in ITPB, should support portfolio growth in the medium term. In addition, its pipeline of two ROFR with Ascendas Land Int and Ascendas India Devt Trust could be catalysts for upward earnings surprise when executed.

Relevance: Our DDM-backed price target is reduced to S$1.01 to reflect a higher risk free rate of 3.9%, 10% risk premium and lower terminal growth rate of 1%. AiT is currently trading at attractive FY09F and FY10F yields of 8.5% and 9.4% respectively, and offers 26% upside to our price target. We continue to like AiT for its quality portfolio, and its 3-pronged growth strategy of (i) proposed development pipeline, (ii) development potential of a further 2.7m sqft of SBA and (iii) 2 ROFR with its sponsor

Trust remains confident of withstanding near term headwinds

• Portfolio continues to demonstrate leasing strength: Notwithstanding concerns of potential IT/ITES slowdown and oversupply issues in Bangalore/ Hyderabad, management maintained that it continues to witness strong offtakes/rental increases in its asset portfolio. We note that ~24% of existing leases are up for renewal in FY09 and ability of the trust to renew / sign on additional leases at higher Y/Y rents should, in our view, provide proof of its ability to withstand a challenging macro environment.

• IT Park vs SEZ share price overhang: (1) Softer issues on regulation implementation, (2) remote location of new SEZ assets, (3) tenant motivation and (4) materially better quality of assets vs competition, were some of the key reasons underpinning management’s confidence in its ability to weather a potential tenant migration impact to SEZ.

• Funding issue – How bad is it for local players? Company is seeing opportunities for acquisition from unlisted players but did not think there was a funding distress as yet. Valuations in the primary market have not significantly come down, though deal flow has increased considerably.

• Maintain OW: We have recently revised our target price on ai-trust to S$1.36, as we factor in higher cost of capital (12.5%), in line with revisions done for other S-REITs. Key risks to our PT are changes in regulations/fiscal policy for IT Parks.