ESR-REIT - CGS-CIMB Research 2019-06-17: Revitalising Its Portfolio

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

ESR-REIT - Revitalising Its Portfolio

  • ESR-REIT (SGX:J91U) announced the proposed acquisition of 49% of PTC Logistics Hub for S$44.4m and two proposed AEIs for S$45.7m.
  • The transactions will be funded with an equity fund raising of up to S$150m, part of which will also be used to repay debt.
  • We maintain our ADD call with a Target Price of S$0.60 pending greater clarity following the EGM for the preferential offering.

Part 1: Proposed acquisition of PTC Logistics Hub via 49% JV

  • ESR-REIT (SGX:J91U) has entered into a 49% JV with Poh Tiong Choon Logistics (PTC) (Unlisted) to acquire PTC Logistics Hub. The purchase consideration is S$225m, out of which S$146.2m is expected to be funded by debt taken on by the JV, implying an LTV of 65% for the acquisition.
  • The total cost to ESR-REIT of S$44.4m comprises its share of the purchase consideration (S$38.6m), stamp duty (S$3.3m) and transaction cost (S$0.6m).
  • The property is a 6-storey ramp-up general warehouse with a gross floor area of c.1m sq ft and serves as PTC’s corporate headquarters. The lease term is for 10 years with fixed rental escalations of 1.5% annually.

Part 2: Proposed AEIs for 7000 AMK and UE Biz Hub East

  • ESR-REIT plans to tap on unutilised plot ratio to redevelop the existing car park space at 7000 Ang Mo Kio Ave 5 (7000 AMK) into a new high-specification industrial space of c.270,000 sq ft. ESR-REIT holds 80% economic interest in 7000 AMK and its share of the total AEI cost is S$35.7m.
  • Meanwhile, ESR-REIT is in advanced negotiations with prospective tenants to take up the space. Construction is expected to commence in 4Q 2019 and take 18-24 months.
  • UE Biz Hub East (UEBH) will undergo an asset enhancements initiative (AEI) where the drop-off areas, office lobbies and façade will be upgraded to refresh and reinforce UEBH’s position as a leading business park in the east of Singapore. ESR-REIT expects the works to cost S$10m, commence in 4Q 2019 and take 12 months.

Part 3: Proposed Equity Fund Raising of up to S$150m

  • The proposed equity fund raising (EFR) will comprise
    1. a private placement of c.195m new units at an issue price of S$100m, and
    2. a non-renounceable preferential offering to raise gross proceeds of more than S$150m.
  • ESR-REIT intends to use the proceeds for the acquisition of PTC Logistics Hub, the AEIs at 7000 AMK and UEBH, to repay debt and to cover transaction expenses.
  • Based on the pro-forma financial effects from ESR-REIT assuming the transactions were completed on 1 Jan 19, annualised DPU would have declined 40.3%.

Maintain ADD with a DDM-based Target Price of S$0.60

  • As the private placement has not been completed and the details of the preferential offering have not been determined pending an EGM, we have not factored the impact of these transactions into our numbers and maintain our forecasts.
  • A key catalyst would be accretive acquisitions while downside risks include dilutive fund raisings.

LOCK Mun Yee CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | https://research.itradecimb.com/ 2019-06-17
SGX Stock Analyst Report ADD MAINTAIN ADD 0.600 SAME 0.600