Brokers' take: Ascendas Reit upgraded to 'add', analysts note strong fundamentals

ANALYSTS like Ascendas Real Estate Investment Trust (A-Reit) for its robust balance sheet, diversified portfolio and tenant base, focus on sustainability, and its better portfolio occupancy achieved in the third quarter.

And given the slump in the unit price of the business space and industrial real estate investment trust, CGS-CIMB has also upgraded the counter to "add" from "hold".

The brokerage increased its dividend discount model-based target price to S$3.20, from S$3.12 previously, as it rolled forward its assumptions to FY21.

"A-Reit's (share) price has retraced by about 13 per cent over the past three months, and offers an attractive FY21 yield of 5.1 per cent," analysts Lock Mun Yee and Eing Kar Mei wrote in a note on Monday night.

Likewise, Jefferies, which has a "buy" recommendation, said in a report on Tuesday that after the recent selloff in A-Reit units, valuations are now "a bit more reasonable with 8.4 per cent forward yield plus growth".

OCBC Investment Research deemed the stock "a good entry point", given that it is trading at an attractive dividend yield of 5.1 per cent for FY20 and 5.4 per cent for FY21, based on Monday's closing price. The research team rated the counter a "buy" with a fair value of S$3.92.

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"We like A-Reit's ongoing sustainability drive. It recently issued a S$100 million green bond and S$300 million green perpetual securities... and also has the largest number of BCA (Building and Construction Authority) Green Mark properties among S-Reits (Singapore-listed real estate investment trusts)," said OCBC on Tuesday.

CGS-CIMB's analysts also cut their estimates for FY20 distribution per unit (DPU) marginally, but raised their estimates for FY21-22 DPU to factor in interest cost savings from the green perpetuals issued in September, which were used to redeem the earlier 4.75 per cent perpetuals on the latter's first call date.

CGS-CIMB's higher FY21-22 DPU estimates also took into account new contributions from two Australian properties under development, slated to be completed in the next two years.

In a note on Tuesday, Maybank Kim Eng (Maybank KE) maintained its "buy" rating and target price of S$4.00 for A-Reit.

Maybank KE analyst Chua Su Tye wrote that the trust has delivered yet another steady quarter, and is the research team's top sector pick.

"Fundamentals remain strong, supported by scale, concentrated business parks portfolio, and DPU upside from further overseas diversification," Mr Chua said.

"Valuations are demanding at 5.4 per cent FY21 yield," he added.

CGS-CIMB noted that A-Reit's balance sheet is healthy with gearing at 34.9 per cent and about 6 per cent of its total debt to be refinanced for the rest of FY20.

"Based on a 50 per cent aggregate leverage assumption, A-Reit has potential debt headroom of about S$4.2 billion to fund any acquisitions," said the CGS-CIMB analysts. "This puts the trust in a strong position to evaluate inorganic growth opportunities."

CGS-CIMB also pointed to the slight uptick in A-Reit's portfolio occupancy to 91.9 per cent for Q3, from 91.5 per cent in the previous quarter. This was boosted by higher occupancy in the Singapore portfolio but partly offset by weaker Australia take-up, according to the A-Reit manager's business update on Monday evening.

The bulk of new demand in the latest quarter came from government and related sectors, making up some 73 per cent of contracted net lettable area. Jefferies analyst Krishna Guha wrote: "We think the demand was mostly related to stockpiling of essentials and/or healthcare related."

Despite the higher occupancy rate, its overall rental reversions turned negative to average -2.3 per cent for leases renewed in the latest quarter, dragged by the Singapore properties, although this remained in line with guidance, Maybank KE said.

Still, the management has reiterated that it expects to achieve low single-digit positive rental reversions for FY20.

Maybank KE is optimistic on A-Reit's rental growth outlook, as its business parks remain under-rented and "should deliver stronger, high single-digit, reversion into Q4 2020", according to Mr Chua.

But CGS-CIMB flagged that the leasing environment may continue to be challenging as tenants reassess or put their expansion plans on hold.

Jefferies said that the manager will be working closely with tenants, which most likely indicates a focus on occupancy and some rental support.

Meanwhile, DBS Group Research has a "buy" call on the counter with a S$4.00 target price, which implies 32 per cent upside based on Monday's closing price.

DBS said in a note on Tuesday morning that A-Reit's "well-diversified" portfolio offsets the challenging outlook.

In its business update, A-Reit's manager had said the trust's customer base comprised more than 1,450 tenants across over 20 industries, with no single property accounting for more than 4.5 per cent of its monthly gross revenue.

Units of A-Reit were trading at S$3.08 as at the midday break on Tuesday, up S$0.05 or 1.7 per cent.