DBS Group Research has started BHG Retail REIT at “buy” with a target price of 60 cents representing a 10% upside to the REIT’s last-closed price of 55 cents as at June 30.
To analysts Woon Bing Yong and Derek Tan, the worst is over for the REIT as it is expected to recover from its three-year declining trend in the FY2021.
The REIT’s distribution per unit (DPU) has been on the decline since FY2018 as units that were previously waived from distributions have regained their entitlement to distributions.
FY2020 is said to be the year where the REIT sees the bottom of its declining DPU trend as there are now no more distribution waiver units remaining. The Covid-19 pandemic also looks set to recover, contributing to a higher distributable income for the REIT.
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In addition, the REIT is exposed to cities that could see high rental growth, note Woon and Yong in a June 30 report.
The REIT is also supported by an established sponsor with a right of first refusal (ROFR) over 12 assets, and could acquire more assets outside of the ROFR.
“Using the proposed acquisition of Badaling Outlets as a basis, we estimate that BHG REIT has an acquisition firepower of between $300 million and $500 million when combined with a rights issue,” say the analysts.
As such, Woon and Yong have projected that the REIT will see a 34.4% y-o-y growth in DPU to 3.01 cents for the FY2021.
“Just [around] 25 million units are expected to regain their entitlement to distributions in FY2021 and its impact will be more than offset by BHG REIT’s rebound from the Covid-19 pandemic,” they write.
They have also estimated that FY2022 DPU could increase 8% y-o-y to 3.25 cents and “rise steadily from hereon” due to the lack of remaining distribution waiver units.
The way they see it, BHG Retail REIT has high growth potential with its exposure to key cities such as Hefei and Chengdu.
Both cities saw urban disposable income grow by a five-year compound annual growth rate (CAGR) of 8.5% and 7.9% in Hefei and Chengdu compared to Beijing’s 7.2%.
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In the same vein, retail spending in Hefei and Chengdu grew faster at a five-year CAGR of 16.6% and 7.3% respectively compared to the 5.7% seen in Beijing.
“Arguably, BHG REIT’s assets in Hefei and Chengdu may potentially enjoy higher rental growth even as its Beijing Wanliu mall provides a stable foundation,” write Woon and Tan.
Woon and Tan’s target price estimate is based on a weighted average cost of capital (WACC) of 8.0%, a terminal growth rate of 2.5%, and implies a target yield of 5.4% for the FY2022.
“Overall, while BHG REIT trades at a premium with a FY2022 yield of 5.8%, we think that investors are paying for higher growth potential and a visible pipeline by buying the REIT,” they write.
Units in BHG closed flat at 55 cents on June 30.
Photo: BHG Retail REIT
