ESR-REIT - CGS-CIMB Research 2019-01-18: Looking To Be A Bigger Fish In A Bigger Pond

ESR-REIT (SGX:J91U) | SGinvestors.io ESR-REIT (SGX:J91U)

ESR-REIT - Looking To Be A Bigger Fish In A Bigger Pond

  • Expect a re-rating from a larger market capitalisation and trading liquidity.
  • Upside to yields from operational cost synergies and economies of scale via integration of enlarged portfolio.
  • Accretion from the acceleration of AEIs and inorganic growth from the large Sponsor’s pipeline could provide further upside to our target price of S$0.62.

FY18 results in line with expectations

  • Post-merger with Viva Industrial Trust, ESR-REIT (SGX:J91U)'s FY18 DPU of 3.857Scts (+0.1% y-o-y) was supported by a 43% increase in NPI and offset by a 141% increase in units from the merger and the preferential offering. FY18 DPU was largely in line with consensus and formed 108% of our forecast.
  • ESR-REIT recorded a -2.9% rental reversion for FY18 (-15.8% in FY17) while occupancy improved slightly to 93.0%. WALE declined to 3.8 years from 4.3 years in FY17 while tenant retention improved to 56.6% from 47.2% in 3Q18.
  • Gearing went up to 41.9% with 83.4% of debt on fixed interest rates.

Growing into its new stature

  • Post-merger, ESR-REIT’s market capitalisation increased by 100.2% to S$1,616.8m and its trading liquidity improved 63.6% to 2.47m based on average daily volume traded. As a result, we believe a re-rating could occur as it establishes a track record.
  • We think there is potential upside to earnings from cost synergies of 2-3% once operational efficiencies are achieved in the medium term.

Riding the industry wave up from the trough

  • From 2019, we expect the supply of industrial property to taper off with business parks seeing the smallest increase across the segments. We view this positively since the merger resulted in business parks becoming ESR-REIT’s largest segment, contributing 31.5% of FY18 rental income.
  • ESR-REIT is also nearing the end of its conversion strategy to increase the proportion of multi-tenanted buildings. We expect this to provide flexibility for ESR-REIT to capture rental upside in an increasingly stabilised market.

Possible AEIs to unlock value and acquisitions to grow the portfolio

  • We expect ESR-REIT to undertake asset enhancement initiatives to maximise unutilised plot ratios and to upgrade lower specification properties. Possible AEI candidates include 7000 Ang Mo Kio and 3 Tuas South Ave 4. Refer to the PDF report attached for further details on the possible AEIs. 
  • Furthermore, the Sponsor’s pipeline offers > 10m sqm of operating assets in Asia Pacific excluding Singapore. We think acquisitions are likely once the integration is successfully completed.

Maintain ADD with a Target Price of S$0.62

  • We increase our FY19-FY21F DPU by 6.8% to 8.4% to incorporate the actual impact of the merger and update occupancy and rental reversion assumptions.
  • Overall, we maintain our ADD call and a DDM-based Target Price of S$0.62. Refer to the PDF report attached for valuation details. 
  • We expect to see a re-rating in the long term once a track record has been established.
  • Downside risks are a slower recovery in industrial rents and large tenant non-renewals.

LOCK Mun Yee CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | https://research.itradecimb.com/ 2019-01-18
SGX Stock Analyst Report ADD MAINTAIN ADD 0.620 SAME 0.620