ESR-REIT - CGS-CIMB Research 2019-07-23: Long Term Re-rating On Track Despite Caution

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

ESR-REIT - Long Term Re-rating On Track Despite Caution

  • Maintain ADD with a lower Target Price of S$0.61 after accounting for the EFR, lower business park occupancy assumptions offset by higher capital distributions.
  • ESR-REIT (SGX:J91U) expects flattish rents as tenants turn cautious due to weaker outlook although 2Q19 results were still in line.
  • Gearing reduced to 39% in 2Q19 as EFR proceeds used to pare down debt.

Maintain ADD with a lower Target Price of S$0.61

  • We retain our ADD call but lower our DDM-based Target Price to S$0.61 after incorporating the impact of the equity fund raising (EFR) and lower business park occupancy assumption but slightly offset by a higher capital distribution component.
  • We like ESR-REIT for its re-rating potential post-merger as the portfolio is right-sized and stabilised; as of 2Q19. We think ESR-REIT’s undistributed capital gains are sufficient to smooth out any income uncertainties.
  • Key risks include any dilutive fund raisings.

Cautious sentiment returning

  • ESR-REIT sees tenants turning 9-12 months ago. ESR-REIT has not seen tenants giving back space although the pace of negotiations has been slower.
  • Business parks from Cisco at UE Biz Hub East; we lower our incentives that tenants might get during the asset enhancement period. Hence, we cut our FY19-21F DPU estimates.

Flattish expected to in 2H19

  • ESR-REIT experienced a slight decline in portfolio occupancy to 91.0% (92.0% in 1Q19) across its multiple property types as tenants turn cautious.
  • Rental reversions for 2Q19 YTD was +0.1% (+1.6% in 1Q19); we understand that reversions for Logistics and General Industrial assets dipped slightly due to the large market supply and older assets respectively. ESR-REIT expects rental reversions to be flattish for 2H19.

Lower gearing; no impact expected from potential rule changes

  • Gearing declined to 39% (42% in 1Q19) as some equity fund raising proceeds were used to pare down debt. ESR-REIT has an all-in cost of debt of 3.98% and no major refinancing requirements due in 2019; 89.2% of its interest rate exposure is fixed.
  • While the potential increase in leverage limits by MAS could give them more flexibility, ESR-REIT does not expect any major change in its capital management strategy as a result of this.

2Q/1H19 25/50% of our/consensus

  • ESR-REIT's 2Q/1H19 DPU of 1.004/2.011 Scts was in line at 25/50% of our/consensus FY19 forecast; this included a higher distribution from other gains of S$3.8m (S$2.1m in 1Q19). The departure of Cisco from UE Biz Hub East contributed to a 1.6% decline in revenue.
  • We understand that ESR-REIT still to be paid out.

LOCK Mun Yee CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | https://research.itradecimb.com/ 2019-07-23
SGX Stock Analyst Report ADD MAINTAIN ADD 0.640 SAME 0.640