DBS Group Research analysts Dale Lai and Derek Tan have kept a “buy” rating on ESR-LOGOS REIT with a target price of 50 cents.
After ESR-LOGOS REIT’s successful merger with ARA LOGOS Logistics Trust (ALOG) in April, the REIT is now the fifth largest industrial Singapore REIT with a total asset base of approximately $5.5 billion but has yet to see a re-rating.
“With large cap industrial Singapore REITs trading at around 20 bps premium over its mid cap peers, we believe that the market has yet to re-rate ESR-LOGOS REIT, despite its ability to access a significant pipeline of assets and support from an enlarged sponsor group,” says Tan and Lai. “In the medium term, as ESR-LOGOS REIT executes on its value-accretive plans, we expect its P/NAV to trade closer to its large cap peers, implying an approximate 18% upside to its share price from current levels.”
At a yield of around 7.4%-7.5%, ESR-LOGOS REIT’s yield is more than 200 basis points (bps) higher than the larger cap industrial Singapore REITs and is attractive, says Lai and Tan. “The manager is executing on an asset repositioning strategy post-merger, which should be value accretive and drive a re-rating in share price, in our view,” they add.
The analysts also note that ESR-LOGOS REIT has an undemanding P/NAV of only 1.1x as well.
For the immediate horizon, ESR-LOGOS REIT will embark on the repositioning of its portfolio with close to $200 million of divestments carried out since FY2021 ended December.
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ESR-LOGOS REIT will continue to divest non-core assets and recycle proceeds into higher yielding opportunities. The rejuvenation of its portfolio entails redevelopment projects and AEIs that will drive organic growth in earnings and upside to NAV.
While its peers find it increasingly challenging to make accretive acquisitions given the negative cap rate spreads in most major markets, Lai and Tan believe that ESR-LOGOS REIT can look to its sponsor’s pipeline of approximately US$2.0 billion in the medium term.
“With a substantial pipeline of assets available in Japan and Singapore where cap rate spreads are still conducive, ESR-LOGOS REIT could be one of the few industrial REITs to experience exponential portfolio growth,” Tan and Lai say.
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Some risks observed by the analysts include ESR-LOGOS REIT’s relatively high gearing of around 41%, putting it at risk of requiring fund-raising to fund major capex, though a revaluation uplift mid-year could potentially allay such fears.
As at 10.03am, units in ESR-LOGOS REIT are trading flat at 40 cents at a distribution yield of 7.5%.
