Upgrade to BUY
Previous Rating: HOLD
Current Price: S$1.995
Fair Value: S$2.23
Sturdy set of results. Ascendas REIT (A-REIT) reported a 9.6% YoY growth in 2QFY12 gross revenue to S$121.7m, due to contribution from completed development projects and acquisitions. While NPI grew at a slower pace of 7.9% YoY due to utility charges and change in lease structure, distributable income was up 14.1% to S$70.5m, due in part to lower interest expenses. On a QoQ basis, gross revenue grew 1.5%, while NPI and distributable income rose 2.0% and 6.9% respectively, boosted by completion of Nordic European Centre acquisition in Jul. 2QFY12 DPU was 3.38 S cents (+2.4% YoY, +5.6% QoQ), bringing 1HFY12 DPU to 6.58 S cents. This is slightly above our expectation, which makes up 54.0% of our full-year DPU forecast (49.5% of consensus).
Strong execution. A-REIT continued to deliver during the quarter, despite the current uncertain economic environment. Occupancy rates improved to 96.4% for the portfolio and 93.0% for the multi-tenanted buildings from 96.2% and 92.5% in 1QFY12 respectively. As anticipated, the group achieved positive rental reversion (1.8-11.6%) across all segments of its portfolio. Management guided that 6.7% of its property income is due for renewal for the remaining of FY12, and that the current market rental rates are still approximately 12-40% higher than the passing rents for area due for renewal. As such, we may see yet another round of positive rental reversion in 3Q.
No major refinancing risk. As at 30 Sep, A-REIT aggregate leverage was at 31.5%, a healthy level in our view. Even after funding all committed investments of ~S$255m (which will see leverage rise to 34.5%), the group still has an available debt headroom of ~S$555m before reaching the 40% mark. This places A-REIT in a comfortable position to fund potential investment opportunities as these arise. The group also recently renewed a S$200m committed revolving credit facility for another five years. Moreover, its debt is relatively well-spread, with no more than S$400m due for refinancing in any one year. Hence, we do not foresee any refinancing risk in A-REIT.
Upgrade to BUY. We raise our FY12 forecasts by 2.4-5.7% to accommodate the 2Q results. Accordingly, our DDM-based fair value is lifted to S$2.23 from S$2.17 previously. We like AREIT for its market leadership, resilient portfolio and proven track record. Noting that the stock has fallen since our last report to a level where we find compelling, we now upgrade AREIT from Hold to BUY.
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