Friday, January 25, 2019

Ascendas India Trust (SGX:CY6U) 4Q18 Review

This is a quarterly update to my previous write-up on Ascendas India Trust (AIT). AIT reported stellar results, even in SGD terms, considering the steep decline of the INR versus the SGD. The INR slid by 9.8% over the comparable quarter a year ago. NPI rose by 14% in INR terms, and 4% in SGD terms.

Economic Outlook

The outlook for the INR is more positive for 2019, following a turbulent year for Emerging Markets in general. India's Current Account Deficit should narrow this year, as crude oil prices have plunged. As India is a net importer of crude oil, lower oil prices strongly benefits the Indian economy and reduces its import bills. Also, other external factors such as the end of the US Federal Reserve interest rate hike cycle, will ease pressure on Emerging Market currencies. However as we will see below, AIT still managed to generate decent returns in SGD terms despite the rough year for the INR.

The Indian economy is quite insular, unlike the other major economies of Asia that are heavily dependent on exports and broader global economic growth. The country is a net importer, resulting in a persistent current account deficit. While this insularity has hampered growth in the past, this cushions the economy from the worst of a global economic slowdown. The ongoing trade war between US and China is expected to have little impact on India regardless of the outcome. In addition to that, India is Asia's fastest growing major economy, growing above 7% annually, and is expected to keep that position as China continues to slow down.

Company Analysis

In NPI terms, AIT continues to demonstrate solid growth, with the growth trajectory set to be sustained in coming years. Strong rental reversion driven by a robust Indian economy and a healthy pipeline of assets under development remain the primary growth drivers for AIT.

Quarterly dividends continue to rise, following the private placement of shares in 2018, acquisition of new assets and strong rental reversions. This is an example of a management undertaking accretive acquisitions that seem to be frankly, quite lacking in the S-REIT space as of recent years. Note that over the last few years since 2014, AIT has been able to increase its floor space and DPU consistently by raising equity and debt in the right proportions so as to not stretch the balance sheet. 

Total debt-to-asset ratio remains comfortable at 33% (statutory limit: 45%), giving the REIT headroom to grow further.

Long-term prospects secured by steady pipeline. The asset pipeline as of 31st December 2018 points to AIT's floor area rising to 20.1 million square feet from the present 12.6 million square feet. On 3rd January 2019, Ascendas-Singbridge announced the acquisition of a parcel of land in Chennai to develop a new IT park, with a potential floor space of 2.3 million square feet. This represents potential assets that could eventually be injected into AIT, boosting the pipeline to a potential 22.4 million square feet.

Acquisition of Ascendas-Singbridge by CapitaLand. AIT will come under the CapitaLand stable of REITs following the merger. As CapitaLand has no meaningful presence in India or overlap in terms of business operations with Ascendas-Singbridge in that market, I do not expect this merger to materially change AIT's business model or fundamentals.

AIT remains fundamentally solid, with the latest quarter results affirming its growth story. With the INR expected to be on a stronger footing this year, the drag on DPU growth should be lower this year. In an environment of weak or zero DPU growth for the overall SREIT sector, I expect AIT to be one of the better performers.

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