Acquisitions Of Summerville And DHL Centers Will Diversify Portfolio Amid Vacancy Risks

Key Takeaways

• Strategic acquisitions and redevelopments aim to boost revenue and enhance property values through logistics centers and asset enhancement initiatives.
  
• Positive rental reversions and strong financial health support income growth and provide flexibility for strategic expansions.
  
• Divestments, market cap rate expansions, and speculative builds pose risks to revenue growth, financial stability, and anticipated earnings for CapitaLand Ascendas REIT.

Catalysts

CapitaLand Ascendas REIT (CLAR) is Singapore’s first and largest listed business space and industrial real estate investment trust.

• The acquisition of logistics centers like the Summerville Logistics Center and DHL Indiana Logistics Center is expected to drive revenue growth, as these properties are strategically located and expected to benefit from onshoring and reshoring trends in the U.S. logistics market, yielding attractive NPI yields of 7.2% to 7.4%.
  
• The planned redevelopment of Logis Hub at Clementi, which aims to maximize plot ratio and incorporate modern features, is expected to significantly enhance property value and drive future rental income, contributing to increased revenue and potentially improved net margins upon completion.
  
• Positive rental reversions of 11.6% across Singapore, the U.S., Australia, and the UK/Europe demonstrate strong leasing demand and pricing power, which supports stable or improving net margins and earnings growth in the future.
  
• The ongoing investment in asset enhancement initiatives (AEIs) and strategic redevelopments, such as those in Singapore and the potential for the Singtel data centers, aim to rejuvenate the portfolio and generate higher returns, potentially leading to higher net operating income and margins.
  
• The overall financial health with a moderate gearing ratio of 37.7% and a well-managed debt maturity profile provide the flexibility to pursue further strategic acquisitions or developments, supporting sustained revenue growth and potentially improving earnings through optimized capital allocation.

CapitaLand Ascendas REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CapitaLand Ascendas REIT's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 49.6% today to 44.8% in 3 years time.
• Analysts expect earnings to reach SGD 707.5 million (and earnings per share of SGD 0.17) by about February 2028, down from SGD 755.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.3x on those 2028 earnings, up from 15.4x today. This future PE is greater than the current PE for the SG Industrial REITs industry at 22.7x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.22%, as per the Simply Wall St company report.

CapitaLand Ascendas REIT Future Earnings Per Share Growth

Risks

• The divestment of key properties, including those in Brisbane and Singapore, resulted in a decline in gross revenue by 2.2% in the second half of 2024, which could lead to decreased earnings if not offset by new revenue streams.
  
• Cap rate expansion in markets like the U.S. and Australia indicates potential decreases in property valuations, which might affect net asset value and financial stability.
  
• Persistent vacancies in U.S. and Australia portfolios, particularly in business parks, could negatively impact occupancy rates and future rental income, thereby affecting revenue and net margins.
  
• The high dependency on positive rental reversions to maintain income growth may face challenges amid potential mid-single-digit rental reversions in 2025, impacting future distributable income.
  
• The reliance on speculative builds without firm tenant commitments, such as the Logis Hub redevelopment, introduces risk to anticipated returns, which could affect future earnings.

Valuation

• The analysts have a consensus price target of SGD3.155 for CapitaLand Ascendas REIT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SGD3.53, and the most bearish reporting a price target of just SGD2.9.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SGD1.6 billion, earnings will come to SGD707.5 million, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of SGD2.64, the analyst price target of SGD3.16 is 16.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.