Lacking catalysts

Raising our target price to S$2.05 from S$1.72. Our DDM-backed target price reflects a lower cost-of-equity assumption of 8.2% (8.7% previously). We reduced our risk free rate assumption by 50bps due to continued low interest rates. A-REIT will be reporting 2QFY10 results on 19 Oct and we expect annualised DPU of 13.26¢, a 12.2% decline over FY09. The decline in DPU is attributed to the larger share base following its share placement exercise earlier this year. Maintain NEUTRAL. Recommend entry at S$1.80.

Occupancy expected to remain at healthy levels. Reflecting the stabilisation in global demand, occupancy rate for A-REIT’s multi-tenanted properties is expected to remain at 94%, unchanged over the preceding quarter. We expect overall portfolio occupancy to remain at 97% owing to the contribution from single tenanted buildings with long term leases. Through our channel checks, we have not heard of any recent tenancy defaults. Systemic hi-tech rents have been declining in tandem with office rents. However, as A-REIT’s hitech/ business park properties are still 20-30% below market spot rates, we expect rental reversion to remain positive.

Focus on built-to-suit and other acquisition opportunities. Following its S$296m equity fund raising exercise, A-REIT has a sturdier balance sheet with a gearing of 29.3%. With a gearing of below 30%, we believe there is little need for management to further recapitalise its balance sheet, easing concerns that our forecast dividend yield would be diluted. A-REIT has indicated that about S$120m of its recent proceeds could be used partly or wholly fund potential acquisition and/or built-to-suit development opportunities.

Still trading above heyday yields of 6%. At current prices, A-REIT offers investors a stable dividend yield of 7% for FY10 and FY11 – with dividends well supported by the long-term leases on single-tenanted buildings which accounts for 50% of revenue. Between 2005 and 2007, A-REIT traded at 6% forward yield. Our TP of S$2.05 offers a yield of 6.5%, a reasonable peg in our view. We recommend buy on dips as stock has rallied 80% since Mar 09.

NAV premium unjustified

Rating maintained at 4

Moody’s upgrades mainboard-listed Ascendas Reit’s outlook

Credit ratings agency Moody’s has upgraded its outlook on the rating for Singapore mainboard-listed Ascendas Reit.

It has now given the firm an outlook of “stable” rating, up from “negative”.

Moody’s said the upgrade reflects Ascendas Reit’s better credit metrics.

It noted that Ascendas Reit has been making ongoing efforts to improve its capital management, thereby strengthening its balance sheet and enhancing its financial flexibility.

However, Moody’s remains cautious of weaknesses in Ascendas Reit’s operating environment and the new supply of industrial properties coming on-stream, although it said that any weakness will be manageable, given Ascendas Reit’s good quality assets and improved financial workings.

Upside Limited After Factoring In Dilution

Embark on equity fundraising. Ascendas REIT (A-REIT) has launched a private placement of 185m new units at S$1.63 to S$1.70 each, or 3.8% to 7.8% discount to the volume-weighted average price on 7 Aug 09. This is the second private placement this year. The equity fundraising exercise is expected to raise gross proceeds of S$301.6m, which will be used in the following manner:

• S$175.4m will be used to fund the development of a hi-tech built-to-suit facility for Singapore Telecommunications (SingTel),
• S$120.6m will be used to fund potential acquisitions of income-producing properties and built-to-suit development opportunities in the pipeline, and
• The balance will be used for general corporate and working capital purposes.

The book building process started yesterday and is expected to be completed by 12 Aug 09. A-REIT’s gearing will be reduced from 35.7% to 29.3% after completion of the private placement.

Downgrade to HOLD. We have cut DPU forecast for FY11 by 6.7% to 11.2 cents due to dilution from the private placement. We have also factored in contributions from the built-to-suit facility for SingTel starting 1QFY11. Share price has gained 29.4% ytd and upside is limited after factoring in dilution from the private placement. Our fair price of S$1.81 is based on the Dividend Discount Model (required rate of return: 7.7%; growth: 2.5%).