ESR-REIT (SGX:J91U)
ESR-REIT - Proposed Merger With Sabana REIT
- ESR REIT’s 1HFY20 DPU of 1.162 Scts came in below expectations.
- We see more operational synergies and potential inclusion into NAREIT as the main benefits of the proposed ESR REIT-Sabana REIT (SGX:M1GU) merger.
- We reduce our FY20-22F DPU by 8-9% as we had earlier underestimated its operating expenses. Maintain ADD with a lower Target Price.
ESR-REIT's 1HFY20 results impacted by Covid-19 and lease conversion
- ESR REIT (SGX:J91U)’s 1HFY20 revenue declined 11.5% y-o-y to S$113.8m, while NPI dropped by a larger 16.8% y-o-y to S$80.2m. The NPI decline was mainly due to lease conversion from single to multi-tenancy for certain properties, non renewals and downsizing by certain tenants, as well as rental rebates of S$4.6m for tenants affected by Covid-19.
- ESR REIT's 1HFY20 DPU of 1.162 Scts (-42% y-o-y) made up 40% of our FY20F forecast, mainly due to income retention of S$7m in 1Q. See ESR REIT Dividend History.
- ESR REIT's occupancy improved slightly to 91.1%, with retention ratio in 1HFY20 at 86-87%. Rental reversion was -4.3% in 2Q20, mainly due to the renewal of one anchor tenant. Excluding this, rental reversion would have been -0.2%. Rental collection rate remained high at > 90%.
ESR-REIT and Sabana REIT plan to merge
- In a separate announcement, ESR REIT announced that it was planning to merge with Sabana REIT (SGX:M1GU) by way of a trust scheme arrangement with ESR REIT acquiring all units of Sabana REIT. See ESR REIT Announcements, Sabana REIT Announcements. Assuming an issue price of S$0.0401 and the gross exchange ratio of 0.94x, the implied scheme consideration is S$0.377 per Sabana REIT.
- Post-merger, Sabana REIT will be a wholly-owned sub-trust of the enlarged REIT and delisted, while the sponsor ESR is expected to hold approximately 12.2% of the enlarged REIT.
- The deal requires approvals from the unitholders of both REITs and is expected to be completed by Oct-Nov 2020.
Proposed merger will be DPU accretive for both REITs
- On a proforma basis, the proposed merger is expected to be DPU accretive for both ESR REIT (+3.5%) and Sabana REIT (+12.9%). The merger will solidify ESR REIT’s position as one of the top 5 industrial REITs in Singapore. Free float market cap would also increase by 42% to S$1.26bn, slightly below the EPRA Index Inclusion threshold of S$1.3bn.
- Operational benefits are
- higher exposure to high-specs and logistics assets,
- more diversification,
- increased economies of scale in operations, leasing and marketing,
- access to lower cost of capital, and
- improved flexibility to undertake AEIs.
Reiterate ADD
- While the proposed merger will benefit both REITs, we think Sabana REIT is the larger beneficiary.
- We reduce our ESR REIT's FY20-22F DPU by 8-9% as we had earlier underestimated its operating expenses. Our rolled-over FY21F DDM-based Target Price is reduced to S$0.49.
- See ESR REIT Share Price; ESR REIT Target Price; ESR REIT Analyst Reports; ESR REIT Dividend History; ESR REIT Announcements; ESR REIT Latest News.
- Re-rating catalysts include continuous recovery from Covid-19 and inclusion into NAREIT index.
- Downside risks include no repayment of the retained income in 1Q.
- See also Sabana REIT Share Price; Sabana REIT Target Price; Sabana REIT Analyst Reports; Sabana REIT Dividend History; Sabana REIT Announcements; Sabana REIT Latest News.
EING Kar Mei CFA
CGS-CIMB Research
|
LOCK Mun Yee
CGS-CIMB Research
|
https://www.cgs-cimb.com
2020-07-16
SGX Stock
Analyst Report
0.492
DOWN
0.500
