SINGAPORE (June 20): OCBC has downgraded Ascendas REIT to “hold” from “buy” with an unchanged fair value estimate of $2.66 given valuations are no longer valuable at this juncture.
In a Wednesday report, lead analyst Andy Wong says the REIT’s unit price has appreciated 19.8% year to date (YTD) to make it the second best-performing Singapore REIT.
This is all thanks to the REIT’s outstanding performance given its significant exposure to the local business park and science park segments.
But OCBC's forecast FY18 distribution yield of 5.8% for the REIT comes in at about 1.4 standard deviations below the five-year average.
“Our downgrade is also premised on our projections for relatively modest DPU growth of 0.9% in FY18, partly due to a full-year effect of an enlarged unit base arising from the conversion of all its Exchangeable Collateralised Securities into units in FY17,” explains Wong.
Womg however acknowledges there is potential upside to his DPU forecasts should A-REIT make DPU-accretive acquisitions, and hence believe investors can lock in some gains.
This is because he sees significant debt headroom of about $1.1 billion before the REIT reaches an aggregate leverage ratio of 40%, given A-REIT’s healthy aggregate leverage ratio of 33.8%.
Despite recent encouraging manufacturing and trade data for Singapore, Wong believes downside risks remain for A-REIT, given how its management has guided for subdued or flat rental reversions in FY18 due to uncertainties over demand and supply pressures.
“A bright spot could come from A-REIT’s strong presence in Sydney (50.9% of its Australian portfolio valuation), in our view. JLL has projected average prime rents in the Outer Central West and South Sydney precinct to grow at a CAGR of 2.5% and 3.5% from 2017 to 2021, respectively,” he states.
As at 10.58am, units of A-REIT are trading 3 cents lower at $2.68.
