Analysts from Citi Research, DBS Group Research, OCBC Investment Research (OIR) and Soochow CSSD Capital Markets have kept their “buy” calls on ESR-REIT following the REIT’s 2QFY2021 results.
See: ESR-REIT sees 13.9% higher DPU of 0.754 cents for 2Q21; 14.3% higher DPU of 1.554 cents for 1H21 and CGS-CIMB raises TP for ESR-REIT on acquisitions and potential inclusion in FTSE EPRA Nareit Index
Daiwa Capital Markets has maintained “hold” on the REIT while Morningstar Equity Research has rated it at three stars out of five, which means that the brokerage believes that investors are likely to receive a fair risk-adjusted return (approximately cost of equity).
ESR-REIT, on July 23, reported a 13.9% y-o-y growth in distribution per unit (DPU) of 0.754 cents for the 2QFY2021 ended June, bringing its DPU for the 1HFY2021 to 1.554 cents.
Citi Research
Citi Research analyst Brandon Lee has pegged a target price estimate of 46 cents on ESR-REIT.
The price is derived from the assumption of a risk-free rate of 1.95%, overall cost of equity of 7.6% and terminal growth of 0.5%, he writes in a July 23 report.
“We have not factored in any potential earnings accretion or dilution from any unannounced acquisitions. For revalued net asset value (RNAV), we value ESR-REIT’s Singapore properties at a weighted average cap rate of 6.1%,” he adds.
To him, the REIT’s results for the 2QFY2021 reveals an improving industrial operational landscape, especially on logistics and manufacturing.
That said, a sizeable supply growth and resurgence of Covid-19 infections may present a slight dampener on growth, with the latter having a larger impact on the food and beverage (F&B) industry. The F&B industry makes up 1.7% of the REIT’s income, he notes.
On share price catalysts for the counter, Lee has identified acquisitions and the potential partial relaxation (if any) of the DC moratorium as a factor that may drive growth in ESR-REIT’s share price.
While the REIT’s 2QFY2021 stood in line with Lee’s expectations, he estimates the REIT to post “muted share price performance in view of [the] results”.
A sharp rise in interest rates, which could increase the cost of debt, as well as a sharp slowdown in economic activity could affect the REIT’s DPU and valuations, he says.
Daiwa Capital Markets
Daiwa analyst David Lum has upped his target price estimate to 42 cents from 38 cents previously, which is still the lowest estimate on Bloomberg.
This is because he believes that “there is still downside risk to ESR-REIT’s sustainable DPU in view of the delicate recovery of the industrial market in Singapore,” he says in a July 23 report.
That said, the REIT’s results during the 1HFY2021 stood in line with his estimates.
He has also upped his DPU forecasts for the FY2021 to FY2023 by 0.1% to 0.7% after including the divestment of the REIT’s two non-core properties, which are scheduled to be completed by the 2HFY2021.
Lum has also raised his management-fee-in-units assumption to 60% from 50%.
“With the observed compression of property yields for new-economy assets, we lift our 12-month target price to 42 cents from 38 cents on a tighter yield spread assumption of 5.3% (100 basis points higher than the average post-GFC yield spread of the large-cap industrial REITs) from 6.2% (ESR-REIT’s average post-GFC yield spread),” he writes.
Downside risks, to him, include “severe negative rental reversions in subsequent quarters” or a DPU-dilution transaction.
Positive risks include a major DPU-accretive investment or inclusion in a REIT market index.
DBS Group Research
DBS analysts Dale Lai and Derek Tan have increased their target price on ESR-REIT to 53 cents from 45 cents previously as they see stabilisation in the REIT’s earnings and core revenues.
The new estimate is based on discounted cash flow (DCF) with a weighted average cost of capital (WACC) of 6.5% (and a risk-free rate of 2.5%). The new estimate has not factored in any acquisitions or the effects of the proposed merger.
“With operations stabilising, we expect core revenues to continue their gradual recovery and for FY2021 DPU to increase more than 12% y-o-y,” they write in a July 26 report.
“Income contribution from the recent acquisitions will also begin contributing from 3QFY2021 onwards,” they add.
ESR-REIT’s sponsor’s US$30 billion ($40.76 billion) portfolio also provides the REIT with a potential pipeline for acquisitions.
To Lai and Tan, the REIT has organic growth opportunities within the portfolio.
“As the Covid-19 situation stabilises, ESR-REIT has resumed its asset enhancement initiatives (AEI)s and has identified further AEI opportunities to unlock value,” they write.
Morningstar Equity Research
Morningstar analyst Tan Cheng Wee has also deemed ESR-REIT’s 1HFY2021 results as in line, as he keeps his target price estimate of 44 cents.
To Tan, he is positive on the REIT’s recent three-pronged effort to scale up its portfolio with AEIs, acquisitions in Singapore as well as in Australia.
That said, the near-term growth initiatives are priced in, and the units in the REIT are currently fairly valued, he writes.
On the REIT’s results for the 2QFY2021 and 1HFY2021, Tan says “our takeaways from the rental reversion performance point toward a generally more positive tone on leasing activities as reflected by a pickup in the general industrial segment, as well as continued resilience in the logistics segment”.
“The business park segment weakness, however, is still subject to the work-from-home trend and space consolidation, notably from the banking sector,” he adds.
To this end, Tan notes that a key near-term concern may be a drag on the REIT’s DPU performance for the 2HFY2021 due to the potential of rental rebates amid the recent return to Phase 2 (Heightened Alert) measures in Singapore, as well as the holding back of leasing activities.
“Hence, the trust envisages low impact to overall DPU performance from potentially dishing out rental rebates of about $300,000 to $400,000 in the next quarter, a low level compared with 2020,” writes Tan.
OCBC Investment Research
OCBC analyst Chu Peng has upped her fair value estimate on ESR-REIT to 48 cents from 45 cents previously on the back of the REIT’s results being in line with her expectations.
Her new estimate has also factored in the acquisitions and divestments, she writes in a July 26 report.
On the environmental, social and governance (ESG) front, Chu deems ESR-REIT’s performance to have declined due to the weakening governance structure on related party transactions.
“ESR REIT’s environment score trails its peers due to fewer green-certified buildings in its portfolio relative to peers. However, its human capital development ranks higher than industry average, with comprehensive employee development efforts including strong managerial and leadership development training initiatives,” she writes.
Soochow CSSD Capital Markets
Soochow CSSD Capital Markets analyst Soh Lin Sin deems the REIT to be “unvexed” by the Phase 2 (Heightened Alert) measures as he pegs the REIT’s target price estimate to be at 48 cents.
Like the analysts before him, Soh deems the REIT’s results for the quarter and half-year period as in line with his estimates.
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As most of the leases expiring in the 2HFY2021 are on track for early renewals, Soh expects ESR-REIT’s rent reversion to be at a “slight negative to flattish range” in FY2021.
Year-to-date (y-t-d) rental reversion for the REIT stood at -1.6%
“ESR-REIT’s unutilized provision made in FY2020 could provide cushion to Phase 2 (Heightened Alert) impacts, while organic and inorganic growths, coupled with lower borrowing costs, should continue to boost DPU. In addition, potential inclusion in the FTSE EPRA Nareit Global RE Index Series could pave way for better funding position,” he writes.
Units in ESR-REIT closed flat at 44.5 cents on July 28, or 1.1 times P/BV, according to Daiwa’s estimates.
Photo: ESR-REIT
