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Is Ascendas REIT still a 'buy'? Analysts seem to think so, pegging TPs starting from $3.20

Felicia Tan
Felicia Tan2/16/2022 04:32 PM GMT+08  • 7 min read
Is Ascendas REIT still a 'buy'? Analysts seem to think so, pegging TPs starting from $3.20
A-REIT was said to have strong fundamentals and attractive valuations, according to the analysts.
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Analysts are all positive on Ascendas REIT (A-REIT) after it reported a distribution per unit (DPU) of 7.598 cents for the 2HFY2021 ended December and FY2021 DPU of 15.258 cents.

CGS-CIMB Research analysts Lock Mun Yee and Eing Kar Mei are keeping their “add” call but with a slightly lower target price of $3.20 from $3.31 previously.

“We continue to like A-REIT for its diversified and resilient portfolio and healthy balance sheet,” write the analysts in their Feb 8 report.

While the REIT’s DPU for the 2HFY2021 and FY2021 stood in line with the analysts’ estimates, Lock and Eing have trimmed their DPU estimates for the FY2022 and FY2023 by 2 to 2.1%. As at end-December, A-REIT has 79.4% of its borrowings in fixed rates. Its manager has guided that a one percentage point change in average funding cost would impact its DPU by 2%.

According to Lock and Eing, potential re-rating catalysts for A-REITs unit price include a faster-than-expected global recovery and accretive new acquisitions. On the flip side, a protracted economic downturn would be a downside risk for the counter.

DBS Group Research analysts Dale Lai and Derek Tan have also kept “buy” on A-REIT with a lower target price of $3.65 from $4 previously.

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“Our discounted cash flow-based target price is lowered to $3.65, based on a weighted average cost of capital (WACC) of 6.1% with a higher assumed risk-free rate of 2.5%,” write the analysts in their Feb 9 report.

That said, Lai and Tan deem A-REIT as being “attractively valued” compared to its other large-cap peers. The REIT currently offers an attractive yield of 5.7%, which is among the highest amongst its Singapore REIT (S-REIT) peers.

“Having acquired more than $2.1 billion in FY2021, A-REIT is on track to deliver DPU growth of 4.6% in FY2022,” say Lai and Tan.

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In addition, the analysts feel investors have neglected the REIT’s myriad of structural tailwinds from e-commerce, data centres and office decentralisation, which would drive the REIT’s earnings and capital values up in the longer term.

“We believe that investors have not priced the net asset value (NAV) uplift from the redevelopment of its other Science Park assets into properties with higher specifications and higher plot ratios,” they write. The potential redevelopment of 1 Science Park Drive, together with A-REIT’s sponsor, paves the way for $5.6 billion in gross development value to be unlocked from its assets at Science Parks 1 and 2, add the analysts.

“A-REIT’s proactive rejuvenation of its portfolio to add value to older properties and tap on unutilised plot ratios will create a further upside to earnings.”

However, Lai and Tan estimate that an increase in lending rates will negatively impact dividend distributions, which poses as a key risk to the REIT, in their view.

Maybank Securities analyst Chua Su Tye has kept “buy” on A-REIT with an unchanged target price of $3.65 on its “sound fundamentals”.

“[A-REIT’s] fundamentals remain strong, backed by scale, rising DPU visibility, upside from acquisitions and/or redevelopments, and further overseas diversification,” writes Chua in his Feb 9 report.

“With $13.0 billion or 80% of assets under management (AUM) entrenched in new economy assets, AREIT remains the best S-REIT growth proxy,” he says.

For more stories about where money flows, click here for Capital Section

While A-REIT’s results for the 2HFY2021 and FY2021 missed the brokerage’s estimates due to higher-than-expected performance fees, Chua says its valuations remain undemanding at an FY2022 yield of 5.9% and DPU compound annual growth rate (CAGR) of 4%.

As at end-December, A-REIT’s portfolio occupancy jumped to 93.2% from 91.7% in the 3QFY2021 ended September.

To Chua, the demand from new economy sectors, at 78% of the REIT’s gross revenue have pushed vacancies to the tightest in five years, and “should support leasing efforts into the coming quarters”.

On rental reversions, Chua notes that the REIT’s management kept a low single-digit positive guidance for the FY2022, to which he remains optimistic on the REIT’s rental outlook as Singapore’s industrial rents are bottoming out, and its expiring leases in Australia supported by strong logistics demand.

“Proactive portfolio reconstitution has strengthened [A-REIT’s] balance sheet. We expect management will endeavour to recycle capital into higher-yielding and newer assets,” writes Chua.

RHB Group Research analyst Vijay Natarajan has, too, kept “buy” on A-REIT with the same target price of $3.60 as the REIT’s results stood broadly in line with his full-year estimates.

On the REIT’s share price weakness over the past 12 months, Natarajan attributes it to a combination of fund-raising overhang, concerns over operations, and interest rate hikes.

“However with strengthening operational metrics and rate hikes largely priced in, we expect a turnaround this year,” he writes in his Feb 9 report.

A-REIT is also a pioneer in environmental, social and governance (ESG) policies amongst industrial REITs with the highest number of green-certified assets. According to Natarajan, this is reflected in RHB’s high ESG score of 3.33 out of 4.0, based on the brokerage’s proprietary in-house methodology.

The score is the highest among the S-REITs, he says.

“As this score is three notches above our country median ESG score, we applied a 6% premium to our intrinsic value,” he adds.

The research team at OCBC Investment Research has kept “buy” on A-REIT with a lower fair value estimate of $3.63 from $3.83 previously. The team has also lowered its DPU forecasts, as well as its terminal growth rate assumption from 2% to 1.75% given expectations of higher utility expenses ahead on the back of a more moderated macro growth environment.

Like CGS-CIMB’s analysts, the OCBC team has noted and factored in the impact of rising interestrates on the REIT.

“79.4% of its debt has been fixed, and based on A-REIT’s sensitivity analysis, every 20 basis point increase in interest rates is expected to have a negative DPU impact of 0.06 cents ([around] 0.4% of FY2021 DPU),” writes the OCBC team.

For the FY2021, A-REIT’s results came in slightly below the brokerage’s expectations.

“Although management was entitled to performance fees given that DPU growth exceeded 2.5%, it voluntarily made a one-off waiver of its entitled performance fee to the extent of the effect of the rental rebates, given that these rebates would have artificially depressed FY2020’s DPU,” notes the team.

Despite the lower fair value estimate, the team sees A-REIT has having solid operating metrics, including its broad-based positive rental reversions in the 4QFY2021.

Within Singapore, rental reversions were positive, and driven mainly by the biomedical and agri/aquaculture, IT & data centres and engineering industries, note the analysts at OCBC.

To this end, a stronger-than-expected recovery in industrial rents, accretive inorganic growth opportunities and the divestment of non-core assets at attractive valuations are potential catalysts for A-REIT.

Investment risks include a slowdown in macroeconomic conditions, which may dampen demand for industrial assets, as well as a spike in interest rates which could raise the REIT’s borrowing costs.

In addition, a depreciation in the Australian dollar (AUD), Euro, British pound and US dollar (USD) against the Singapore dollar (SGD) would impact distributions repatriated to Singapore,” adds the team.

Finally, UOB Kay Hian analyst Jonathan Koh has maintained “buy” on A-REIT with a higher target price of $3.92 from $3.83 previously, after the REIT’s 2HFY2021 results stood in line with his estimates.

In his report on Feb 9, Koh deems the REIT’s distribution yield of 5.9% for the FY2022 as “resilient”.

He has kept his DPU forecast for the FY2022 unchanged at 16.6 cents.

According to him, catalysts to the REIT’s unit price include resiliency and growth from the business parks, logistics and data centre segments, and contributions from development projects and asset enhancement initiatives.

As at 4.28pm, units in A-REIT are trading 4 cents higher or 1.43% up at $2.83, or an FY2022 P/B of 1.13 times and dividend yield of 5.9%, according to CGS-CIMB’s estimates.

Photo: A-REIT

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