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CGS-CIMB ups TP on ESR-REIT, expects greater price upside

Khairani Afifi Noordin
Khairani Afifi Noordin • 3 min read
CGS-CIMB ups TP on ESR-REIT, expects greater price upside
CGS-CIMB Research analyst Eing Kar Mei has kept “add” on ESR-REIT
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CGS-CIMB Research analyst Eing Kar Mei has kept “add” on ESR-REIT, expecting greater price upside driven by improvements in operating metrics, income contributions from acquisitions as well as narrowing valuation gap with its peers.

Eing has also raised her target price on the REIT to 53.8 cents from 52.1 cents previously. Her new target price implies a still attractive distribution per unit (DPU) yield of 5.8% due to its inclusion into the FTSE NPRA Nareit Index.

ESR-REIT delivered stable operating metrics in 2020 and 1HFY2021 despite the pandemic, says Eing. Occupancy rate in 1H21 was 91.7%, higher than the 90.5% achieved at end-2019.

Tenant retention was also higher at 70.8% in 1HFY2021 vs. 69.6% at end-2019. “Although rental reversion was -1.6% in 1HFY2021 (from -5% in 1QFY2021), we think this is encouraging in view of the weak operating environment due to Covid-19,” says Eing.

See: RHB sees further upside for ESR-REIT, ups target price to 54 cents

In line with the external economic environment recovery, CGS-CIMB expects some improvements in the industrial leasing market, led by the demand for logistics and high-specs space.

“Overall, in view of ESR-REIT’s diversified exposure in various industrial segments, we expect the REIT to deliver flat rental reversion and stable income for the rest of the year,” says Eing.

She highlights that ESR-REIT’s relatively higher cost of equity versus its peers did not stop it from acquiring assets. In fact, it continued to make accretive acquisitions, demonstrating its commitment to growing the REIT inorganically despite the challenges.

In June, ESR REIT made its maiden overseas accretive acquisition in Australia by acquiring a 10% stake in the ESR Australia Logistics Partnership.

It also acquired a five-storey modern ramp-up logistics facility in Tanjong Penjuru, which it intends to enhance into an air-conditioned warehouse. This could potentially provide over 20% rental upside, says Eing.

To further boost its income, the REIT has identified two major asset enhancement initiatives (AEIs) year-to-date on two of its high-spec industrial assets - 16 Tai Seng Street and 7000 Ang Mo Kio.

Meanwhile, 19 Tai Seng - which is under conversion from a general industrial to a high-specs property - will be completed around 3Q21 and has seen a good 63% committed occupancy.

On a stabilised basis, these AEIs are expected to generate a good 7% yield on cost, says Eing.

ESR-REIT’s share price has appreciated by about 18% year-to-date. It is now trading at its five-year mean of 6.4% DPU yield versus 7.5% to 9% in March 2020 to June 2021.

Its cost of borrowing has reduced from 3.9% in 2019 to 3.2% at end-June 2021. “We understand that there is still room for lower cost of debt,” says Eing.

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The REIT’s recent inclusion into FTSE EPRA Nareit index would also improve its trading liquidity and potentially further lower its cost of capital.

“With the lower cost of funding, ESR-REIT will be in a better position to make accretive acquisitions,” says Eing.

Despite the higher target price estimate, Eing has reduced her DPU estimate for the FY2021 to FY2023 by 0.4% to 3.2%, mainly factoring in the divestment of a non-core asset at 45 Changi South Avenue 2 and delay in AEI.

As at 3pm, units in ESR-REIT are trading flat at 46.5 cents, implying an FY2021 P/B of 1.11 times and dividend yield of 6.4%.


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