Bank of America (BofA) Securities has downgraded ESR Cayman to “neutral” from “buy” with a lower target price of HK$26.50 ($4.63) from HK$31 previously following its announced bid on ARA Asset Management on Aug 4.
See: ESR Cayman acquires ARA Asset Management for US$5.2 billion and Why ESR Cayman is acquiring ARA at multiples of NAV
The downgrade is based on a lower EBITDA multiple of 21 times (from 23 times) for its funds under management (FUM) platform (ex-ARA) and expected dilution valuation on a higher share base, while the target price downgrade implies a FY2022 EV/EBITDA of 18 times, say BofA analysts Donald Chua and Chan Xian Ning in an Aug 6 report.
“Our assumptions assume the deal goes through. We continue to view ESR’s track record in fund management positively, but see a de-rating in valuation multiple driven by an erosion of ESR’s pure play exposure to APAC logistics/data centres, a theme we believe investors ascribe higher valuations for and slower growth rates in longer-term fund fees, with bulk of ARA’s platform derived from lower growth type of perpetual and core funds,” they write.
Chua and Chan, have, however, lifted their earnings per share (EPS) estimates for the FY2022 to FY2023 to factor in a “mild earnings uplift” from the proposed acquisition.
In addition, the maiden dividends in FY2022, significantly larger assets under management (AUM) and stronger earnings quality will help offset the negatives, they add.
To the analysts, the acquisition is swapping the niche exposure that ESR Cayman enjoys, for scale.
To be sure, ARA is the largest real estate investment manager (REIM) in Asia Pacific (APAC) with US$95 billion ($129.04 billion) in AUM.
The acquisition, say the analysts, would lift ESR’s AUM to US$129 billion, transforming it from the niche logistics player to becoming the third-largest listed REIM in the world.
While scale matters, the move is also dilutive to ESR’s exposure to logistics properties, which is a sector that is well-placed to benefit from structural growth, note the analysts.
“Post-acquisition, new economy sector will account for 80% of ESR’s EBITDA but less than 40% of its AUM. ARA has a diversified platform across commercial property, new economy, credit and infrastructure. We see expect growth in FUM from traditional asset classes to lag logistics,” they write.
“Adding new sectors also brings about uncertainties in capital allocation as ESR juggle’s multiple funds across diversified sectors. This uncertainty could prove to be a drag on the stock,” they add.
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As at 12.02pm, shares in ESR Cayman are trading 20 HK cents lower or 0.8% down at HK$24.85, with a dividend yield of 0%, according to BofA’s estimates.
Photo: ARA LOGOS Logistics Trust
