DBS analysts Dale Lai and Derek Tan have maintained their “buy” recommendation on Ascendas REIT (A-REIT) with a target price of $4.00, representing more than 30% potential share price upside.
In a note, the analysts say that A-REIT offers an attractive yield of about 5.6%, more than 100 basis points higher than other large-cap industrial Singapore REIT peers.
The analysts also point out that they believe investors have neglected A-REIT’s myriad of structural tailwinds. These range from e-commerce, data-centers and office decentralisation, which would drive earnings and capital values higher in the longer term.
“Over the past decade, A-REIT has been concentrating its growth around new economy assets such as business and science parks, high-specification industrial properties and logistics facilities,” the analysts say.
See: RHB upgrades Ascendas REIT to 'buy' rating, other analysts all mantain 'buy'
Since its listing, A-REIT’s portfolio has been anchored by its properties in the Science Park 1 and Science Park 2 clusters. The company further strengthened its foothold as a REIT that is focused on new economy assets following its $904.6 million acquisition of a portfolio of data centres in Europe.
Currently, about 85% of its portfolio is made up of new economy assets with business and science parks taking up the lion’s share, the analysts note.
Science Park 1’s first cycle of rejuvenation began more than seven years ago. Eight older properties were redeveloped into modern business park facilities to cater to the growing R&D needs.
As the technology, life sciences and biomedical sectors expand in Singapore, Lai and Tan expect another wave of growing demand for high-quality new economy facilities in the Science Park and One-North precincts.
“We believe the redevelopment plans for the TÜV SÜD PSB Building comes at a very opportune time, especially as A-REIT works to maximise the plot ratio of the asset, potentially leading to an about 2.5 times increase in the asset’s gross floor area.
“This sets a precedent for A-REIT to tap on the unutilised plot ratio of its older assets within Science Park,” say the analysts.
Based on DBS estimates, an increase in plot ratio to 3.5 for its 12 assets in Science Parks 1 and 2 could lead to a more than 24% increase in A-REIT’s NAV.
“Although we recognise that redeveloping some of the younger properties may not be feasible in the near term, it makes sense for a majority of the properties, especially those with a lower plot ratio currently,” the analysts add.
From a valuation perspective, the uplift in RNAV would make A-REIT the cheapest large-cap industrial REIT on a P/NAV basis, the analysts highlight.
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The upcoming redevelopment of the TÜV SÜD PSB will cement A-REIT’s position as one of the largest landlords of new economy assets in Singapore and drive earnings growth in the medium term.
“During this time when other landlords are finding it increasingly challenging to acquire modern new economy assets, A-REIT only has to look at its own ‘backyard’ to tap on redevelopment projects that could potentially be worth up to $5.6 billion,” the analysts say.
As at 3.11pm, units in A-REIT are trading flat at $3.01, or 1.4 times P/NAV, according to DBS estimates.
