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Analysts mostly positive on ESR-REIT on 'improving prospects'

Felicia Tan
Felicia Tan • 3 min read
Analysts mostly positive on ESR-REIT on 'improving prospects'
Units in ESR-REIT closed 1 cent higher or 2.8% up at 37 cents on Nov 4.
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Analysts from CGS-CIMB and DBS Group Research have given ESR-REIT “buy” recommendations on the REIT’s “improving prospects” following its 3QFY2020 results.

Daiwa analyst David Lum has, however, given the REIT a “hold” rating with a target price of 42 cents.

In his report, Lum says a highly distribution per unit (DPU)-accretive investment with some equity fundraising would help the REIT’s unit price, while a prolonged pandemic that requires distributing further rental assistance to tenants may be a downside risk to the counter.

ESR-REIT on Oct 30 reported 3QFY2020 DPU of 0.798 cents, down 20.2% from the 1.00 cent declared in 3QFY2019, but up 20.5% q-o-q.

See: ESR-REIT reports 20.2% y-o-y drop in 3Q DPU to 0.798 cents

Excluding the release of 50% of the retained income, core distributable income would have been $24.8 million, down 15.1% y-o-y but up 6.0% q-o-q. DPU for the quarter would have been 0.70 cents.

CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee say ESR-REIT’s 3QFY2020 and 9MFY2020 DPU, which stood at 29% and 72% of their FY2020 forecasts respectively, were in line with their expectations.

The way they see it, the REIT is seeing an encouraging outlook. Overall portfolio occupancy is expected to be stable, while rental reversion is estimated to be largely flat for FY2020 and FY2021 with high-spec industrial and ramp-up warehouse to experience positive rental reversion.

The REIT is also expecting asset enhancement initiatives (AEI) at UE BizHub East and 19 Tai Seng Avenue to be completed by 1QFY2021 and 2HFY2021 respectively.

In addition, the REIT has received “strong enquiries” for industrial leasing space from the pharmaceutical and mechanical manufacturing sectors.

“Going forward, the management expects a stable 4QFY2020 and will look to grow ESR-REIT via organic and inorganic growth avenues in FY2021,” they note.

To this end, Eing and Lock have maintained their target price on the REIT of 49 cents.

“We believe that ESR-REIT’s prospects are improving on the back of stronger leasing enquiries of industrial space from prospective tenants and potential AEI initiatives to redevelop some of the properties into high-specification industrials in FY2021,” they write.

“Re-rating catalysts include continuous recovery from Covid-19 while downside risks include weaker industrial property rents,” they add.

DBS analysts Dale Lai and Derek Tan agree amid stabilising portfolio operations, the return of 50% of retained income and healthy leasing demand, a slight improvement in gearing and the resumption of organic growth trajectory.

Lai and Tan say the REIT is also like to return the remaining $3.5 million of retained income in 4QFY2020.

On the proposed merger with Sabana Shariah Compliant Industrial REIT, Lai and Tan foresee other opportunities in the pipeline should the merger fail to push through.

On Nov 4, the REIT announced that it has received in-principle approval from SGX for the listing and quotation of some 989.9 million consideration units.

The managers of both ESR-REIT and Sabana REIT have jointly updated on the indicative timeline of the merger.

See also: ESR-REIT receives in-principle approval from SGX, merger documents issued on Nov 12

"We continue to like ESR-REIT for its speed in ramping up its portfolio performance amid the ongoing COVID-19 pandemic. Management’s track record of carrying out acquisitions and unlocking value through redevelopments gives us confidence in earnings growth going forward,” say Lai and Tan, as they maintain their target price of 43 cents on the REIT.

Units in ESR-REIT closed 1 cent higher or 2.8% up at 37 cents on Nov 4.

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