Maybank Securities has re-initiated “buy” on ESR-LOGOS REIT (E-LOG) with a target price of 55 cents, representing an upside of 42% from the REIT’s last-traded price of 41 cents.
“E-LOG has emerged from its merger with ARA Logos Logistics Trust (ALOG) as one of the top 10 Singapore REITs (S-REITs) by free float, with higher contributions from new-economy assets under management (AUM),” writes analyst Li Jialin on Aug 24.
Following the completion of its merger in April, E-LOG now has $5.5 billion in AUM compared to ESR-REIT’s $3.3 billion in AUM. The $2.2 billion worth of additional assets are in “good locations” in Singapore and Australia, which would help E-LOG gain a “stronger foothold” in key Australian markets, Li points out.
Prior to the merger, ALOG was a pure play REIT that had logistics and warehouse assets.
In addition, the merger with ALOG has boosted E-LOG’s exposure to new-economy assets to 63% in effective gross rental from 47% in 2021, Li says.
“We expect robust contributions from the Australia portfolio due to the strong fundamentals, underpinned by historical low occupancy. We see room for revaluation gains on the back of cap rates compression,” she writes.
See also: Test debug host entity
On this, the analyst says she is positive on E-LOG’s “refreshed focus on new-economy assets, which could provide stronger rental growth”.
“Supply chain disruptions and relocation, post-Covid recovery and rising e-commerce consumption will continue to drive demand for space,” Li says.
“Aside from rental upside, the addition of mature assets further increased occupancy (to 94.1% in 1HFY2022 from 92% in 4QFY2022). We also expect more functional upgrades from asset enhancement initiative (AEI) projects to capitalize on the rental growth momentum,” she adds.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
Post-merger, Li has forecast E-LOG’s revenue to grow by 42% y-o-y to $344 million in the FY2022 and $402 million in the FY2023 on the back of the additional income from the logistics and warehouse assets.
She has also forecasted the REIT’s distribution per unit (DPU) to come in at 2.99 cents in the FY2022 and 3.01 cents for the FY2023, implying an attractive distribution yield of 7.4% for both FY2022 and FY2023 respectively.
Li’s DPU estimates also translate to a P/BV of 1.36x.
“Our sensitivity suggests that an acquisition of $100 million in Japan will at least be 0.6% accretive to DPU (2% cash on delivery (COD), 50% debt and 4% net property income (NPI) yield), while an acquisition of $200 million in Singapore and Australia will at least be 0.2% accretive to DPU (4.5% COD, 60% debt and 4.5% NPI yield),” she writes.
Finally, Li likes E-LOG’s robust balance sheet, as well as its growth prospects backed by its sponsor.
“Post-merger all-in cost of debt fell to 2.97% as of 1HFY2022, and management targets a solid credit rating in 2HFY2022 to further reduce the cost, given its larger AUM. A further 50 basis point (bps) increase in cost of borrowings will negatively impact DPU by 0.7%,” Li says.
She adds: “We see $958.5 million debt headroom supporting acquisitions from its sponsor’s visible pipeline in Japan and Australia, which would provide tailwinds for further AUM growth.”
As at 11.48am, units in E-LOG are trading 0.5 cent higher or 1.22% up at 41.5 cents.
