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AREIT defensive but unattractive valuation

Samantha Chiew
Samantha Chiew • 3 min read
AREIT defensive but unattractive valuation
AREIT defensive but unattractive valuation: RHB
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SINGAPORE (Apr 20): RHB Group Research is keeping its “neutral” call on Ascendas REIT (AREIT) with a target price of $3.00 from $3.10 previously.

In a Monday report, analyst Vijay Natarajan says, “AREIT’s diversified portfolio of 200 industrial assets across three different geographies is expected to stay resilient despite recessionary outlook posed by the Covid-19 pandemic.”

While the REIT’s strengths lie in its experienced management team, strong sponsor, and good operational track record, Natarajan feels “the stock’s current valuation of 1.3 times FY20 price-to-book ratio, is not attractive enough”.

Among its assets in its portfolio, AREIT’s retail, hospitality and leisure segments are expected to be the most impacted. These account for 5% of gross monthly revenue.

“On the positive side, we expect demand to remain strong for data centres (5.6%), logistics & supply chain management (12.2%), and bio medical sciences (11.3%). Overall AREIT’s income is diversified across more than 20 sectors, with no particular segment accounting for more than 15% of income,” he adds.

Meanwhile, near-term DPU is not expected to see any drastic cuts, as RHB channel checks show that the proportion of industrial tenants who have requested rent deferrals remain low (less than 5%).

Although occupancy is expected to remain healthy, rents could come under pressure, as about 19% of leases are due for renewal in FY20, of which 5% are single-tenanted buildings. The bulk (41%) of leases is from its business parks and science parks.

The way he sees it, Natarajan believes "more industrial tenants will be inclined to extend their current leases at lower rents, rather than move to a new premise and incur additional capex" amidst current market conditions. "Overall, we expect portfolio occupancy to stay about 90% but rent reversions are likely to be in -2% to 0% range compared to +6% in FY19."

AREIT’s balance sheet also remains sound, with gearing at an optimal 35.1% with a healthy interest cover of 5.1 times as of Dec 2019. Weighted average debt maturity stands at 4.0 years with only 8% of its total debt maturing in FY20- 21F. Foreign currency risks are also mitigated, with a high level of natural hedges for Australia (73.8%), the United Kingdom (100%) and the United States (75.8%).

AREIT announced on Mar 31, that it has acquired a 25% stake in Galaxis from its sponsor for $102.9 million, representing a 3% discount to valuation, with a proforma NPI yield of 6.2%. The analyst deems this asset as yield accretive. Galaxis, located in One North, comprises a mix of business parks, office space, retail & F&B with a remaining lease-term of 52 years, is 99.6% occupied, with a WALE of 2.5 years.

As at 12.15pm, units in AREIT are trading at $2.87 with a FY20 dividend yield of 5.7%.

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