CGS-CIMB Research analysts Eing Kar Mei and Lock Mun Yee have kept “overweight” on the REIT sector, as a proposed merger between ESR-REIT and ARA LOGOS Logistics Trust (ALOG) was announced on Oct 15.
The proposed merger will see all the units in ALOG acquired with 9.5 cents in cash per unit and 1.6765 new ESR-REIT units per ALOG unit, issued at 51 cents apiece. This works out to a total of 95 cents per ALOG unit.
Upon completion of the merger, ALOG will be delisted and become a sub-trust of ESR-REIT.
The enlarged REIT will be subsequently named ESR-LOGOS REIT.
See: 'Buy' ESR-REIT to lock in yield before share price re-rates: Maybank Kim Eng
The extraordinary general meeting (EGM) is expected to be held in early January 2022 and the delisting of ALOG is said to take place in February 2022.
In their Oct 15 report, Eing and Lock have also recommended “add” on both ALOG and ESR-REIT with unchanged target price estimates of 96.1 cents and 53.8 cents respectively.
To them, the merger “did not come as a surprise” as the analysts anticipated the move under the enlarged ESR Cayman post-merger.
“The transaction fairly values ALOG at market price which is 1.4 times price-to-book value (P/BV), in line with ALOG’s 52- week high closing price and our target price of 96.1 cents. The merger will provide 8.2%/5.8% distribution per unit (DPU) accretion to ALOG and ESR-REIT,” write Eing and Lock.
“The bulk of the accretion will come from lower financing cost and payment of upfront land premium.”
To be sure, the analysts are positive on the merger, believing the enlarged entity to see a re-rating in unit price.
This, they say, is “given the potential acceleration in inorganic growth underpinned by large sponsor pipeline and potential lower cost of funding”.
“Inorganic growth aside, the merger provides more flexibility in performing asset enhancement initiatives (AEIs) and capital recycling by divesting non-core assets without impacting income substantially,” they write. “It aims to recycle a portfolio of non-core assets in the next 18-24 months to create a flagship New Economy REIT. While post-merger gearing is 42.1%, the merged entity has substantial debt headroom of $815 million.”
RHB Group Research analyst Vijay Natarajan has kept “buy” on ESR-REIT with the same target price of 54 cents.
Like CGS-CIMB analysts Eing and Lock, Natarajan says he anticipated the deal itself, although the timing of the announcement was unexpected.
To him, the merger is a positive move, as it transforms the company into a major new economy-focused Singapore REIT (S-REIT).
The move is also necessary when it comes to overlapping acquisition mandates following the proposed acquisition of ARA asset management by ESR-REIT’s sponsor ESR Cayman.
In addition, one of the key merits to the merged entity is the increased exposure to in-demand logistics sector from 16% to 45% and the rapidly growing Australian market.
“Portfolio lease expiry profile will lengthen to 3.2 years with increased proportion of freehold assets and reduced tenant concentration risks,” writes Natarajan in an Oct 18 report.
“More importantly, the larger REIT will have a greater acquisition potential to tap into sponsor’s initial visible pipeline of [around] US$2 billion ($2.70 billion) with more on the offing thus offering promising potential to be
one of the biggest new-economy focused REIT in the region,” he adds.
The new REIT is expected to benefit from a lower cost of capital and operation synergies that will result in cost saving, continues Natarajan.
“The move will allow it to divest some of its older noncore and shorter land lease assets and redeploy the capital into newer ones. Post-merger pro-forma gearing of the enlarged REIT is expected to be 42.1%,” he says.
Finally, Natarajan has derived an environmental, social and governance (ESG) score of 3.0 out of 4.0 for the REIT.
“As this score is in line with the country median score, we do not apply any premium/discount to our intrinsic value.”
UOB Kay Hian analyst Jonathan Koh has recommended ALOG’s unitholders to accept the offer by ESR-REIT. He has given the REIT a fair value of $1.07.
In his report dated Oct 18, Koh is positive on the merger due to the increase in ALOG’s total assets post-merger.
The new entity’s laser-like focus on the new economy and the super-charged growth from its sponsor pipeline is another plus, in Koh’s books.
In addition, the merger is value accretive to ALOG’s unitholders.
“Pro forma 2020 DPU is expected to increase 8.2% to 5.512 cents,” writes Koh.
“Net asset value (NAV) per unit is expected to increase 2.2% to 70.8 cents. On a pro forma basis, aggregate
leverage as of Dec 2020 is expected to increase from 39.8% to 42.1%,” he adds.
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According to Koh, ALOG provides an “attractive” FY2022 distribution yield of 5.8% compared to Frasers Logistics Trust’s (FLT) 5.2% and Mapletree Logistics Trust’s (MLT) 4.3% and P/NAV of 1.39 times, compared to FLT’s and MLT’s 1.33 times and 1.53 times respectively.
Units in ESR REIT and ALOG closed at 46 cents and 88.5 cents respectively on Oct 18.
According to RHB’s estimates on ESR REIT, this translates to an FY2021 P/B of 1.08 times.
UOB Kay Hian’s estimates on ALOG means an FY2021 P/B of 1.3 times.
Photo: ESR Cayman
