DBS Group Research is keeping its “buy” recommendation on Ascendas REIT (A-REIT) with a target price of $4.00.
In a September 24 report, lead analyst Derek Tan says, “Cheaper than its large-cap industrial peers at a 5.0% forward yield and 1.6 times P/NAV, we believe that A-REIT is poised to ‘catch-up’ given similar growth profile of a DPU CAGR of 4.5% over FY21- 23.”
Currently, the A-REIT’s share price is up by 8% YTD, but is noted to have underperformed its industrial large-cap S-REIT peers by 15%.
“We believe that investors have neglected A-REIT’s myriad of structural tailwinds from ecommerce and office decentralisation which we believe will drive earnings and capital values higher in the longer term,” adds Tan.
The stock is trading at an implied cap rate of about 4.6%, which positions A-REIT in a virtuous growth cycle where it can acquire accretively. And this ability to deliver upside in earnings is not appreciated by the market at current prices.
“We believe that investors are also not pricing in the potential upside from the redevelopment and repositioning of its older science park properties (about 20% of its asset value), which brings about accretion in net asset values (NAVs) and income when executed upon,” says Tan.
Meanwhile, the Covid-19 pandemic has opened up expansion and diversification opportunities for A-REIT. It has recently acquired a “green” suburban office building in Macquarie Park, Sydney.
“We view the acquisition positively as it fits A-REIT’s strategy of gaining a foothold within the suburban office space in Australia, whose property attributes are similar to the Business Parks in Singapore,” says Tan.
Furthermore, the analyst believes that the REIT has a quality pipeline to future proof its earnings. It currently has an attractive pipeline of business park properties from its sponsor, and the ability to execute on these acquisitions will have a direct correlation with share price performance.
As at 3.30pm, units in A-REIT are trading at $3.23 or 1.5 times FY20 book with a distribution yield of 4.6%.
