Analysts from DBS and Maybank have maintained their “buy” call for ESR LOGOS REIT (E-LOG) with unchanged target prices (TPs) of 50 cents and 55 cents respectively.
In their report dated Oct 14, DBS Group Research analysts Dale Lai and Derek Tan say that E-LOG’s portfolio rejuvenation has addressed some of its “major bugbears” and is set to drive growth, with the stock overdue for a re-rating as its post-merger synergies “unravel”.
Their target price is based on the discounted cash flow (DCF) method with a weighted average cost of capital (WACC) of 6.6% and a risk-free rate of 3.0% without assuming any acquisitions in the estimates.
Lai and Tan say that despite the adjustments and revised estimates, they believe E-LOG offers a very attractive yield at the current levels and that there is room for some earnings growth over the next few years, even with higher financing costs.
“Following a successful merger in April 2022, E-LOG is now the fifth largest industrial Singapore REIT (S-REIT) with a total asset base of an estimated $5.5 billion, but it is yet to see a re-rating. With a yield of more than 7%, around 200 basis points (bps) higher than its large-cap industrial S-REIT peers, it is attractive,” they say.
“The manager is executing an asset recalibration strategy post-merger, which should be value accretive and drive a re-rating of the share price, in our view,” add Lai and Tan.
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On the immediate horizon, they note that E-LOG will embark on the repositioning of its portfolio with more than $200 million in divestments carried out since FY2021 ended December. “E-LOG will continue to divest non-core assets and recycle the proceeds into higher yielding opportunities. The rejuvenation of its portfolio entails redevelopment projects and asset enhancement initiatives (AEIs) that will drive organic growth in earnings and net asset value (NAV),” they write in the report.
According to them, E-LOG has benefitted from being a pure-play industrial S-REIT that appeals to investors looking to gain exposure to Singapore’s industrial sector. However, one of its “bugbears” has been the short land tenures of Singapore industrial properties, which also meant that its portfolio’s land tenure would decay with time.
Positively, they note that E-LOG began addressing this concern back in mid-2021 through the acquisition of stakes in freehold properties in Australia. With the acquisition of the Sakura Distribution Centre, they say that the proportion of freehold assets in E-LOG’s portfolio will increase to around 8.2% while the remaining land lease tenure of its portfolio will also increase by around 6.0% to 40.8 years.
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Meanwhile, Maybank Securities analyst Li Jialin highlights E-LOG as a new-economy play with low environmental, societal and governance (ESG) risk, scoring 53 points under Maybank’s expanded ESG 2.0 methodology, three points over the average.
“E-LOG has a progressive sustainability framework. We believe improvements in information disclosure and more ambitious longterm targets could help E-LOG obtain a higher score,” says Li.
According to her, E-LOG is making steady progress in ESG and ahead of its environmental targets.
“E-LOG is making steady progress as its Scope 2 GHG emissions, energy and water consumption fell in FY21. We note lower solar power generation in FY2021 due to hardware malfunctioning, and expect maintenance to be completed in FY2022,” says the Maybank analyst.
She notes that ahead of E-LOG reduced energy intensity of multi-tenanted buildings (MTBs) by 14% in FY2021, against an annual reduction target of 1%. “We believe more aggressive ESG targets pertaining to energy and water saving could improve the scores. Notably, E-LOG is the only industrial S-REIT setting water certification targets,” adds Li.
On top of this, Li points out that E-LOG’s all-in cost of debt fell to 2.97% post-merger with ARA LOGOS with management targeting a solid credit rating in 2HFY2022 to further reduce costs.
Her upsides include accretive acquisitions, sooner than expected completion of AEI assets and stronger leasing demand, a further increase in overall leasing demand, driving improvements in both occupancy and rental reversions, as well as the signing of new tenants to drive up occupancy at underleased properties.
On the flip side, downsides for Li include a slowdown in economic activity or structural changes in supply chain norms in Singapore or Australia, the termination of long-term leases causing loss of income and a sharper-than-expected rise in interest rates that could increase the cost of debt and negatively impact earnings.
As at 2.59pm, shares in E-LOG were trading 1.5 cents or 4.48% up at 35 cents, with a dividend yield of 6.97%.
