ESR-REIT (SGX:J91U)
ESR-REIT - BUY This Pure-Play Singapore Industrial REIT
- BUY, unchanged Target Price offers 11% upside plus c.8% FY20F yield. See ESR REIT Dividend History.
- With the industrial sector showing signs of bottoming out, we believe ESR-REIT (SGX:J91U)’s well-diversified and sizeable industrial portfolio is better-positioned to tap into any demand growth. Asset enhancements and streamlining operating costs should be near-term catalysts, along with potential acquisitions.
- Valuations are reasonably attractive, at 1.1x FY20F P/BV.
Manufacturing sentiment turned positive in December; industrial rental rates bottoming out.
- Singapore’s Purchasing Managers' Index (PMI) recorded a marginal expansion of 50.1 pts in December, after seven consecutive months of contraction – which points to a likely bottoming out. Jurong Town Corporation’s (JTC) latest (as per 3Q19) also indicates that industrial rental rates edged up 0.1% y-o-y (flattish q-o-q), along with stable occupancy levels.
Supply tapering post 2020.
- While industrial supply is expected to jump to 1.9m sqm for 2020 (46% higher than the average supply in 2016-2019), the outlook for business parks and high-tech industrial space – where ESR-REIT has the bulk of exposure (44% of AUM) – remains positive. About 7%/17% of leases by rental income are due for renewal in 4Q19/2020, for which we expect flattish rental reversions.
Asset enhancement to be the key near-term focus.
- ESR-REIT is awaiting regulatory approval for partial redevelopment of 7000 Ang Mo Kio Avenue 5. The new industrial space will have a GFA of c.270,000 sqf, with an estimated yield-on-cost of around 9%. Management had earlier guided that the plan is to build a data centre facility, with a back-up option to build a high-tech industrial facility if the necessary approvals are not granted. The site also has an additional 225,000 sqf of unutilised space for future developments.
- Besides this, it has also identified six other assets that have a > 0.5m sqf of unutilised plot ratio for redevelopment. Rejuvenation plans are also underway for key assets, to strengthen its market positioning.
- Overall, we are positive on its redevelopment plans and believe it is a cost-efficient way to unlock unitholder value and future-proof assets.
Potential to leverage and grow on sponsor’s strength.
- ESR-REIT’s sponsor, ESR Group, is the largest Asia Pacific-focused logistics player that develops and manages logistics assets, with AUM of > USD20bn across six countries. The strong sponsor’s expertise should help in terms of operational expertise, and eventually help with overseas market growth at the opportune time. Besides these, the sponsor also has stakes in other industrial S-REITs – which may lead to M&A growth opportunities in the medium term.
- See ESR REIT Share Price; ESR REIT Target Price; ESR REIT Analyst Reports.
- Key risks: Tenant defaults and potential escalation in trade tensions crippling industrial demand.
- ESR-REIT is one of the RHB's Top Singapore Stock Picks for 2020.
Vijay Natarajan
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-01-07
SGX Stock
Analyst Report
0.600
SAME
0.600
