Maybank Kim Eng analysts Matthew Shim and Chua Su Tye have initiated “buy” on ESR-REIT with a target price of 55 cents, representing a 21% upside on the REIT’s last-closed share price of 46 cents on Aug 15.
In an Aug 16 report, the analysts deem the REIT as a “laggard” among its industrial REIT peers with exposure to logistics and high-spec assets.
For instance, shares in ARA LOGOS Logistics Trust and AIMS APAC REIT are up 49% and 24% year-to-date respectively, while ESR-REIT has only seen a 15% growth.
See also: Analysts mostly positive on ESR-REIT with TP estimate of at least 42 cents
This is despite almost half of its gross rental income (GRI) stemming from logistics and high-spec assets.
“We believe this disparity in returns is unjust. In our view, the market has overlooked an incoming logistics star and is unduly hung up on its general industrial and business park exposure,” write Shim and Chua.
In the report, the analysts argue that the “negative perception of its general industrial segment is overplayed and that business park downside risks are largely priced in”.
As such, they believe that the REIT is “ripe for a re-rating” going into the 1HFY2021/2022 based on the high possibility of its being included into the NAREIT index in September.
Other re-rating catalysts include strong logistic sector tailwinds as well as an attractive distribution per unit (DPU) profile.
At this point, investors buying into the REIT would be “well-positioned” to capitalise on a potential re-rating in its share price.
In addition, at this level, the REIT’s yield of 6.5% at 1 times price-to-book (P/B) is attractive.
“We believe ESR-REIT can deliver a Maybank Kim Eng cumulative DPU yield+growth of 11.5% (MKE FY21E yield: 6.5% + MKE FY2020-FY2022 DPU CAGR: 5%), the highest amongst its SG industrial peers and well above the sector mean of 9.7%,” share the analysts with conviction.
Furthermore, the REIT has a “formidable sponsor”, the Hong Kong-listed ESR Cayman, which is set to become the largest APAC real asset fund manager following its recently proposed acquisition of ARA Asset Management.
“In our view, the deal only enhances ESR-REIT’s long-term growth prospects given a more robust acquisition pipeline. We expect minimal immediate term impact to operations but would not rule out potential for further corporate activity in this space,” write Shim and Chua.
For more stories about where the money flows, click here for our Capital section
To the analysts, they only see upside risks to the REIT with a base-case to bear-case risk/reward ratio of 2.5:1 or bull-case to bear-case of 3.6:1.
“Key upside/downside risks are higher/lower rental reversions, the manager’s ability to secure new tenancies at Changi Biz Park and corporate action,” they write.
Shares in ESR-REIT closed 1.5 cents higher or 3.3% up at 47.5 cents on Aug 18.
Photo: ESR-REIT
