Continue reading this on our app for a better experience

Open in App
Home Capital Broker's Calls

ESR-REIT downgraded to 'hold' on potential rental default from Hyflux Membrane

Samantha Chiew
Samantha Chiew • 2 min read
ESR-REIT downgraded to 'hold' on potential rental default from Hyflux Membrane
SINGAPORE (Apr 10): ESR-REIT has been downgraded to “hold” from “buy” previously by OCBC Investment Research with a decreased fair value of 55 cents from 57.5 cents, on the back of lower returns and concerns regarding Hyflux Membrane.
Font Resizer
Share to Whatsapp
Share to Facebook
Share to LinkedIn
Scroll to top
Follow us on Facebook and join our Telegram channel for the latest updates.

SINGAPORE (Apr 10): ESR-REIT has been downgraded to “hold” from “buy” previously by OCBC Investment Research with a decreased fair value of 55 cents from 57.5 cents, on the back of lower returns and concerns regarding Hyflux Membrane.

The research house initiated its coverage on ESR-REIT on Dec 14, 2018 and the stock has since posted total returns of 9.76%, compared to the Straits Times Index’s 7.41%. It still continues to trade at a discount to industrial REITs that also have large portfolios, but this has narrowed significantly since the research house’s initiation.

ESR-REIT also has a relatively high net gearing ratio of 41.9%, which increases its risk of a dilutive equity financing.

At yesterday’s close, the REIT traded at 1.17 times price-to-book, compared to the 1.33 times average of its large portfolio peers. It also has a dividend yield of 7.0% FY19 yield.

In a Wednesday report, analyst Deborah Ong says, “We note that Hyflux Membrane is one of ESR-REIT’s top 10 tenants, accounting for about 3.5% of the total rental income for Dec 2018 and about 7.2% of distributable income for 4Q18.”

Recently, Hyflux has filed for bankruptcy protection. And the analyst has expressed her concerns about ESR-REIT’s exposure to Hyflux. Hyflux Membrane is one of ESR-REIT’s top 10 tenants, accounting for about 3.5% of the total rental income for Dec 2018 and about 7.2% of distributable income for 4Q18.

With this, Ong has identified several mitigating factors for ESR-REIT:

  • Hyflux Membrane has not defaulted in its rental payments
  • Should Hyflux’s business remain intact after the restructuring, she believes there is still a good chance that Hyflux Membrane will continue to rent its current premises (8 Tuas South Lane)
  • The asset is within an established industrial area and ESR-REIT has been receiving leasing interest and enquiries for the space
  • ESR-REIT presently holds security deposits worth three months of rental income, which have yet to be drawn down

“That said, in the case of a default, we believe the asset will be subject to JTC anchor tenant rules which may be onerous to fulfil,” adds Ong.

Nonetheless, property forecasts have been updated to account for a potential Hyflux Membrane rental default.

Looking ahead, a bottoming in industrial rents in 2019 is to be expected, though towards the latter half of the year given the backend-loaded supply injection last year.

Units in ESR-REIT closed at 53 cents on Wednesday.

×
Loading next article...
The Edge Singapore
Download The Edge Singapore App
Google playApple store play
Keep updated
Follow our social media
© 2024 The Edge Publishing Pte Ltd. All rights reserved.