Analysts are mixed on Elite Commercial REIT MXNU after the REIT's distribution per unit (DPU) for the 2HFY2022 ended Dec 31, 2022, fell by 19.6% y-o-y while its FY2022 DPU fell by 11.4% y-o-y.
DBS Group Research analysts Tabitha Foo, Derek Tan and Dale Lai are keeping their “hold” call on Elite Commercial REIT with an unchanged target price of 53 pence (85.6 cents).
“We could turn more positive on the stock if its financial position improves, while there could be upside to earnings if there are positive rent reversions for the 12 properties or if Elite Commercial REIT divests these assets,” the analysts write.
The REIT is the only UK-focused REIT that’s listed in Singapore, occupying a “unique position” within the REITs where it functions as “social infrastructure”.
Following the REIT’s full-year results, the analysts note that the REIT’s rental income growth is expected to be modest in the FY2023 to FY2024 as a result of non-renewal of leases at 12 properties. With the upcoming rent review for a large proportion of the REIT’s portfolio in April 2023, the analysts project rental uplift to be at 15% on the back of record high inflation in the UK.
“However, there could be [an] upside to our conservative occupancy assumptions at these 12 properties in FY2023 to FY2024,” they add.
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While the REIT’s fundamentals remain “intact”, the analysts see the higher cost of debt in a rising interest rates environment weighing on dividends going forward.
“At the same time, a decline in the valuation of the portfolio has resulted in an elevated gearing level of 45.8%, suggesting a limited buffer in terms of regulatory limits,” the analysts add. “Nevertheless, we believe that the portfolio valuation has bottomed out and that any further expansion in cap rates should not be significant.”
Should the REIT’s financial position improves, the analysts say they could turn more positive on the counter. The same applies if there are positive rent reversions for the 12 properties or if the REIT divests these assets.
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“With majority of its rental income derived from leases with the AA-rated UK government, the stable stream of cash flows is a key positive for the REIT,” they write.
That said, there are a few key risks identified by the analysts, which are tenant and country risks, as well as interest rate and regulatory risks.
CGS-CIMB keeps 'add' call with lower TP
CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong are keeping their "add" call as the REIT's 2HFY2022 and FY2022 DPU stood "broadly in line" with their expectations at 46.9% and 100.2% of their full-year estimates.
"We like Elite Commercial REIT’s stable income portfolio, with inbuilt growth through its inflation-linked rental structure," they write.
However, the analysts have lowered their DPU estimates for the FY2023 to FY2024 by 4.5% to 4.8% to factor in higher funding costs.
As a result, their target price is also lowered to 57 pence from 59 pence before.
"Potential re-rating catalysts could come from an improvement in the macro outlook in the UK, while downside risks include tenant concentration exposure to the DWP and a weak pound," they add.
As at 4.14pm, units in Elite Commercial REIT are trading flat at 50.5 pence.
