IREIT Global - DBS Research 2015-11-18: Too cheap to ignore

IREIT Global - DBS Research 2015-11-18: Too cheap to ignore IREIT GLOBAL UD1U.SI 

IREIT Global - Too cheap to ignore 

Concerns largely priced in. 

  • We maintain our BUY call with revised TP of S$0.77. 
  • While the market has rightly placed a liquidity discount over IREIT due to 
    1. its small free float (c 29.5%) and market cap, and 
    2. risk of further devaluation of the EUR versus SGD on the back of potential QE by the ECB, we believe these risks have largely been priced in. 
  • This is because even with a further 10% devaluation of the EUR, IREIT’s FY16F yield is still attractive at 8.5% versus our current forecast of 9.4%. 


Boost from recent Berlin acquisition. 

  • IREIT recently completed the acquisition of a property in Berlin for EUR144.2m, which implies 7.1% proforma FY14 NPI yield. 
  • Beyond the boost in earnings, the property further diversifies IREIT’s portfolio to five German cities and increases cash flow visibility with weighted average lease expiry (WALE) by gross rental income (GRI) now at c.7 years, up from c.6 years previously. 

Exposure to potential cap rate compression in the German real estate market. 

  • With the ECB having embarked on a QE programme to reflate the European economy, we believe IREIT provides investors to a potential uplift in property values through the compression of cap rates. 


Valuation: 

  • We lowered our DCF-based TP to S$0.77 from S$0.90 after incorporating the 45-for-100 rights issue at S$0.468 per unit and the acquisition of the Berlin property. 
  • With an attractive 9.4% FY16 yield and 15% upside to our revised TP of S$0.77 we reiterate our BUY recommendation. 


Key Risks to Our View: 

  • The key risk to our view is a significant depreciation of EUR versus SGD beyond the 1.54 FX rate that our economists have projected. 
  • For every 0.10 change in the EURSGD FX rate, our DCF valuation changes by 6%. 
  • In addition, a weaker than expected inflation rate would also delay any increase in rents.


Mervin Song CFA DBS Vickers | Derek Tan CFA DBS Vickers | http://www.dbsvickers.com/ 2015-11-18
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.77 Down 0.90


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