ESR REIT - DBS Research 2018-09-17: Better Together

SGinvestors.io

ESR-REIT SGX:J91U

ESR REIT - Better Together 

• Synergies to be extracted post ESR REIT - Viva Industrial Trust (VIT) merger.
• Notwithstanding temporary near-term dilution, both sets of unitholders stand to benefit in the medium term as merits of an enlarged vehicle should prevail over time.
• Enlarged platform allows Manager to accelerate planned AEIs and capital recycling to drive shareholder value.
• Maintain BUY; Target Price lowered to S$0.59 after incorporating Viva Industrial Trust numbers.

Maintain BUY with lower Target Price of S$0.59.

• Post consolidation, ESR-Viva to emerge as the 4th largest industrial REIT with c.S$3bn (+79.8%) in assets. The implied acquisition yield of 5.8-5.9% for Viva Industrial Trust’s portfolio is at the lower end of peers’ range of 5.1-6.8% - possibly reflecting the acquirer’s optimism over longer-term prospects and synergies that the REIT can extract. 
• While temporary near-term dilution from the absence of income support for Viva Industrial Trust starting FY19F and issue of new units takes our DCF-based Target Price slightly lower to S$0.59, we believe the merits of an enlarged vehicle will prevail over time. 
• Maintain BUY.

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Where we differ: A premium paid in exchange for longer-term benefits.

• While paying a 26.4% premium to Viva Industrial Trust’s NAV appears high, we believe that
  1. benefits from the injection of Viva Industrial Trust’s higher-quality portfolio (including lower financing costs and trust-level saving), and
  2. merits of an enlarged vehicle should prevail.
• To ensure sustainability in earnings and NAVs, data points that we track will hinge on the Manager’s ability to drive portfolio earnings to compensate for decline in income support for Viva Industrial Trust’s UE BizHub.

Potential catalyst: Acceleration of redevelopment and AEI initiatives.

• Within ESR and Viva Industrial Trust’s respective asset portfolios lies untapped potential – including at least two assets with un-utilised GFA and several others with potential for conversion into higher-spec facilities.
• One of the immediate benefits arising from the merger would be the enlarged REIT’s ability to be more active on this front, driving shareholder value. 

Valuation: 

• Maintain BUY with a lower Target Price of S$0.59. Estimates are reduced to account for dilutive impact in the immediate term as new units are issued to fund the proposed acquisition. 
• We have also assumed conservative estimates for the incoming Viva Industrial Trust portfolio. 

Key Risks to Our View: 

• Lease conversion from single- to multi-tenant. The unfavourable rental reversion resulting from the ongoing conversion of tenancy may bring downside surprises. 

Carmen Tay DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-09-17

SGX Stock Analyst Report BUY Maintain BUY 0.59 Down 0.630