Ascendas REIT: Beneficiary of rising rents; Upgrade to BUY (DMG)

(BUY, S$2.00, TP S$2.42)

1QFY12 DPU in-line; Raising TP on brighter long term outlook. Ascendas REIT (AREIT) reported DPU of 3.2S¢ for 1QFY12 (-5.0% YoY; +6.3% Q. Excluding an one-off item of S$1.7m arising from a tax deduction in relation to an upfront fee for a new loan facility offset by liquidated damages from certain tenants, DPU for 1QFY12 would have been higher by 0.08S¢. Separately, A-REIT announced that it has entered into a S$32.3m built-to-suit (BTS) project to build the first global leadership development centre in Asia for Unilever Asia Pte Ltd (UA). The project will only be completed in 4QFY13. Assuming the project will be financed 50:50 debt:equity financed, we lowered our FY12-FY13 DPU marginally by 0.2-0.3% respectively. However, we raised our TP to S$2.42, derived based on DDM (COE: 8.0%; Terminal growth rate: 1.9%) on the back of 1) future contributions from the BTS project, 2) lower cost of equity, and 3) higher terminal growth rate assumptions. Upgrade to BUY.

Management expects latest BTS project to add 0.03S¢/year. Given the BTS project for UA will only be completed in 4QFY13, we have only factored in incremental contribution from this project beginning FY14. Based on assumed NPI yield of ~8% and 50:50 debt:equity funding, our assumed DPU accretion is ~0.09S¢ vs management’s 0.03S¢ on 40:60 debt:equity funding. The latest BTS project strengthens A-REIT’s credential as a premium-grade industrial REIT as the global development centre for UA will be the second of its kind globally.

Strong positive rental reversion beginning FY12. Backed by rising asset spot rent and imminent renewal of expired leases, AREIT is set to experience strong positive rental reversion in FY12-FY13. Our belief is further strengthened by the fact that average spot rent of business parks, warehouses, and factories have shown the strongest rise since the financial crisis by 13.7-21.8% YoY in 2Q11. Hence, we raise our terminal growth rate forecast from 1.0% previously to 1.9%. In addition, we lowered ß and tenancy risk of AREIT to 0.84 (prev 0.88) and 0.5% (prev 0.7%) to account for lower risk given the rapidly improving industrial space outlook. Consequently, our COE is lowered to 8.0% (prev 8.5%).