Analysts from CGS-CIMB Research, DBS Group Research, RHB Group Research and UOB Kay Hian have kept “add” or “buy” on ARA LOGOS Logistics Trust (ALOG) after the REIT posted 10.6% higher DPU of 2.57 cents for the 1HFY2021 ended June on July 22.
The stronger results were attributable to the higher revenue from the REIT’s Australian portfolio acquisition.
On this, the analysts have also increased their target price estimates on the REIT.
CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee have upped their target price to 96.1 cents from 81.4 cents previously, while DBS analysts Dale Lai, Derek Tan, Geraldine Wong and Rachel Tan have upped their target price to $1.00 from 85 cents previously.
RHB analyst Vijay Natarajan has increased his target price to 95 cents from 85 cents while UOB Kay Hian analyst Jonathan Koh has upped his target price to $1.02 from 89 cents before.
To Eing and Lock, the REIT is better positioned for accretive acquisitions due to the lower cost of capital partly due to its recent appreciation in share price.
During the one-month period, units in the REIT increased by 7.2% from 83.5 cents on June 25 to 89.5 cents as at July 23.
ALOG is also working actively with its sponsor for a potential pipeline in acquisitions, note Eing and Lock.
“While its sponsor, LOGOS has presence in many countries, ALOG sees more opportunities in Australia, China and Singapore,” they write in a July 22 report.
The analysts’ new target price implies a DPU yield of 5.3% for the FY2021. It also represents a premium on the REIT given its potential inclusion into the FTSE EPRA Nareit Index in September, as well as its better positioning for accretive acquisitions, they write.
That said, they have reduced their DPU forecasts for the FY2021 to FY2023 by 1% to 3% after “remodeling its acquisitions based on circular” as well as after taking the divestment of Kidman Park and Changi Districentre 2 into account.
“ALOG is well positioned to ride on the strong demand for logistics warehousing. Key potential re-rating catalyst: Nareit inclusion. Downside risks include weaker rentals,” write Eing and Lock.
To the DBS team, the higher target price is due to the anticipation of a yield compression given its higher-than-peer yields.
The team’s higher target price assumes a target yield of 5.1% for the FY2021 and price-to-net asset value (P/NAV) of 1.5 times.
“The manager is also moving into a virtuous growth cycle, in our view, supported by a significant acquisition pipeline from its sponsor while actively reconstituting its portfolio to sharpen its focus,” writes the team in a July 23 report.
The REIT is one of two pure-play logistics Singapore REITs (S-REITs) with a “very attractive yield of 5.9%”, it notes.
“We are excited that LOGOS brings about a new paradigm for ALOG to grow into. A vertically integrated logistics player, LOGOS offers significant inorganic growth potential, having a logistics portfolio valued at US$16 billion ($21.8 billion) located throughout Asia Pacific. In addition, ALOG can also ride on the strategic partnership with Yang Kee Logistics in Singapore as it harnesses the longer-term structural e-commerce growth trends in Asia,” it writes.
That said, non-accretive acquisitions, where accretions may be marginal, may pose as a key risk to the counter.
To RHB’s Natarajan, ALOG’s strong 1HFY2021 numbers are “in line” with his estimates.
“While valuations are not cheap (post the strong 45% year-to-date or y-t-d share price rally), the stronger-than-expected cap rate compression which has enhanced its acquisition growth potential is an added catalyst,” he writes in a July 23 report.
ALOG, for the 1HFY2021, saw positive rental reversion of 2.4% mainly due to the higher rental rates for lease renewals in Australia. Looking ahead, Natarajan expects rental reversions to remain positive for its Australia portfolio, while its Singapore portfolio may experience flattish to slightly positive rental reversions.
The REIT has 3% of its leases pending renewal in the FY2021 with another 24% by rental income due in FY2022.
Following the recent divestment of three of its low-yield assets, ALOG’s increased size and strong sponsor support means the REIT is able to “score larger portfolio deals of $200 million to $500 million”, says Natarajan.
He has also cut his cash on equity (COE) assumption by 80 basis points on account of the strong cap rate compression and increased liquidity.
ALOG’s results for the 1HFY2021 has, too, come in line with UOB Kay Hian analyst Koh’s expectations.
To him, the REIT’s results have demonstrated “resiliency”.
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In Singapore and Australia, the outlook is optimistic for the REIT with demand for logistics space remaining high in the former and leasing enquiries reaching a 20-year high in the latter.
“The transition from just-in-time to just-in-case supply chains will lead to increased demand for logistics space,” writes Koh in a July 23 report.
To him, ALOG’s transformation is under progress with the REIT’s share price gaining 45% since its initiation on Jan 5.
“Since then, daily trading liquidity has improved from US$1.3 million to US$1.8 million. Valuation discount against its peers has narrowed dramatically, which makes yield accretive acquisitions more feasible and achievable.”
He has also upped his DPU estimates for the FY2021 and FY2022 by 2% due to ALOG’s lower cost of debts.
The REIT’s distribution yield of 6.1% for the FY2022 is “attractive”, says Koh.
As at 9.21am, units in ALOG are trading 0.5 cent lower or 0.6% down at 89 cents or 1.3 times P/B, according to UOB Kay Hian’s estimates.
