Ascendas Reits-CLSA

CLSA’s forecast of a 10% contraction in Singapore’s 2009 GDP suggests a weak outlook for manufacturing/ services sector. This will lower demand
for industrial space. We estimate a peak to trough fall of 50% in all
segments and a 60% for light industrial space. As a result, we cut our
earnings estimate on A-REIT by 8%. The impact of falling rentals on AREIT
revenue line has been mitigated by the new capacity coming on line
in FY10 as well as property tax waiver, and the fact that only 12% of AREIT’s
rentals are coming for renewal in FY10. Our new TP, of S$1.55,
still leaves 25% upside. Maintain BUY
Impact from GDP forecast cut
Weaker outlook on GDP (10% contraction) will result in higher job losses in
the economy, including the manufacturing sector. This sector employs 21% of
Singapore’s total workforce, and could see retrenchments of up to 4,300 jobs
in 1Q09 or 43k jobs in 2009 (a 7.2% contraction). We expect electronics,
machinery and equipment, chemical/petroleum and pharmaceutical subsectors
to see the highest impact with estimated 7-8% contraction in jobs.
Better dynamics in business parks and warehousing
Rentals typically accounts for 10-20% of opex for tenants with most
overheads from staff salary. As demand for exports slows, tenants will reduce
shifts, cut back on staff overheads and capacity before giving up space. The
demand and supply dynamics looks more favourable in the Business parks
and warehousing segment as compared to the factory space where more than
29.5m of space is slated to come onstream over the next three years.
Impact to earnings mitigated by earlier acquisitions
Matching the supply onstream provided by URA together with consultant’s
estimates of precommitted space so far and assuming no further take ups, we
estimate a peak to trough fall of 50% for all industrial segments over the next
three years with the exception of factory space where demand supply
dynamics is weaker at 60% peak to trough. Applying these assumptions, we
expect revenue to see 2% YoY decline mitigated by earlier acquisitions
revenue from development projects costing S$233.6m over the next 2 years.
Maintain BUY
Even after factoring in our fall of 50% peak to trough estimates in spot
rentals, AREIT still throws up 25% upside to our target price. While
manufacturing and trade sector is likely to see more headwinds, we find
comfort in its diversified tenant base and relatively better fundamentals in the industrial space vis-à-vis office and retail. Maintain BUY