CIMB-GK Securities: Ascendas Reit - 14 Mar 2008

Taking over the helm

Ascendas acquires Goodman’s stakes in A-REIT

A-REIT announced that its parent Ascendas Pte Ltd, through its wholly-owned subsidiaries, had made a double acquisition, by:
1) Purchasing the Goodman Group’s 40% equity stake in Ascendas-MGM Funds Management Limited, the manager of A-REIT, for an undisclosed cash consideration on a willing-buyer willing-seller basis.
2) Purchasing Goodman’s 6.28% direct stake of 83,241,801 units in A-REIT for about S$158.16m on a willing-buyer willing-seller basis.
The acquisition of the shares and units is expected to be completed within 10 business days from the signing of the agreements.

The impact

Goodbye, Goodman! Upon the completion of the share and unit sales, Goodman will fully relinquish its co-manager role in Ascendas-MGM Funds Management Limited and holdings in A-REIT. Ascendas would then have a 26.77% holding in A-REIT. A-REIT's manager, Ascendas-MGM Funds Management, would become a wholly-owned subsidiary of Ascendas and will be renamed Ascendas Funds Management (S) Limited.

May open doors to overseas acquisitions. This is a long-awaited move which will leave Ascendas with full control of A-REIT. We see this as positive for A-REIT, potentially opening doors to acquisitions out of Singapore from its parent, Ascendas. Ascendas has at least two overseas funds that may form part of the acquisition pipeline. They are the Ascendas ASEAN Business Space Fund, and the China Industrial and Business Park Fund, both of which acquire and develop industrial properties in their respective regions. However, any acquisition is more likely to happen in the medium to long term, as A-REIT has committed to some S$338m worth of development projects and has already signed MOUs to acquire S$201m worth of properties over 2008-10.

Valuation and recommendation

Upgrade to Outperform from Neutral; but lowered target price to S$2.60 (from S$2.83). Our target price has been reduced to S$2.60 from S$2.83, in line with a higher cost of equity assumption used in-house. The discount rate in our DDM valuation has been raised to 6.7% from 6.2%.

We are, however, upgrading A-REIT to Outperform after the 15% decline in its share price since late January, vs. the market’s 3% drop. We also like Ascendas’s positive move to take full control of the helm. A-REIT has several things going for it, including: 1) conservative capital management (88% of its debt is on fixed interest rates at a weighted average cost of 3.39% and weighted average term of 3.9 years); 2) low asset leverage of 38.9%, well below the regulatory limit of 60%; 3) venture into development projects which offer property yields higher than the 6-7% yields for completed industrial buildings; 4) high rental reversions for its business park as a result of demand spilling over from the office sector; and 5) strong income streams secured on long leases averaging 6.2 years.