SINGAPORE (Jan 18): CIMB Research is maintaining its “add” call on ESR-REIT while raising its target price on the trust to 64 cents from 63 cents previously on lower cost of equity of 8.1% from 8.5% previously.
This comes after ESR-REIT’s FY17 distribution per unit (DPU) came in line with both consensus and the research house’s expectations, at 98% of the latter’s full-year forecast.
See: ESR-REIT posts 6.7% lower in 4Q17 DPU of 0.929 cent
In a Wednesday report, CIMB lead analyst Yeo Zhi Bin says he continues to like ESR-REIT for its relative valuations, the bottoming-out of its organic weakness, as well as a clearer growth path ahead with its recent acquisitions of 8 Tuas Lane and 7000 Ang Mo Kio.
On the trust’s latest set of quarterly results, he notes that the trust’s 4Q17 DPU of 0.929 cents, which represents a 6.7% decline from the previous year, was mainly due to the negative carry from its recent $150 million 4.6% perpetual securities issued in early Nov 2017.
At the same time, its two newly-acquired properties only registered their contributions from mid-Dec 2017.
Nonetheless, the analysts highlights 2017 as a “year of many firsts” for ESR-REIT and remains upbeat on the trust on the belief that its organic weakness is dissipating, being at the tail-end of multi-tenanted building (MTB) conversions.
“EREIT’s 4Q17 financial statements included a couple of new line items which reflected the new management team’s various initiatives. Some examples are the inclusion of non-controlling interest to reflect third-party’s 20% interest in 7000 AMK and the inaugural inclusion of perps. Other key developments included the name change to ‘ESR-REIT’ [from Cambridge Industrial Trust],” comments Yeo.
The analyst further sees potential asset enhancement initiative (AEI) or redevelopment opportunities in 16 Tai Seng, which is currently leased to Nobel Design, on the belief that the property’s “white” space is not fully utilised.
“For 2018, we believe ESR-REIT would look at similar [acquisition] deals as 2017 and re-development opportunities within its portfolio. Downside risk could come from still-challenging industrials market,” he adds.
Meanwhile, DBS Vickers Securities continues to rate ESR-REIT at “buy” with a higher target price of 63 cents compared to 62 cents previously to imply limited upside but a high yield of over 8%.
The research house’s analyst Derek Tan is similarly of the view that investors will, over time, appreciate the REIT’s strategy to reconstitute its portfolio, which would in turn enhance returns – and that earnings have bottomed in the case of its 4Q17 results.
Post the issuance of $150 million in perpetual securities and $35 million in divestment proceeds, DBS notes that ESR-REIT’s manager has quickly redeployed the funds into Tuas South Lane and 7000 Ang Mo Kio, which are both sizable assets worth close to $400 million in total.
It has also factored in an equity fund raising exercise of $125 million in FY18 to partly fund the announced purchases.
“We believe that the market will start to price in premiums to NAVs once we have clarity on the roadmap put forth by Sponsor and the REIT, which might mean diversifying overseas. One of the immediate benefits is the ability to be more active in acquisitions, given a potentially more significant pipeline of deal opportunities,” says Tan.
As at 3:31pm, units in ESR-REIT are trading 0.9% higher at 58 cents.
