SINGAPORE (Jan 7): RHB Group Research is bullish on ESR REIT, as Singapore’s industrial sector shows signs of bottoming out.

After seven straight months of decline, Singapore’s Purchasing Managers' Index (PMI), which is used as an indication of manufacturing sentiment, recorded a marginal expansion in December 2019.

The positive turn comes as Jurong Town Corporation (JTC) in its latest 3Q19 report saw industrial rental rates edge up 0.1% y-o-y along with stable occupancy.

The way RHB analyst Vijay Natarajan sees it, the industrial sector turnaround will bode well for ESR REIT.

“We believe ESR REIT’s well-diversified and sizeable industrial portfolio is better-positioned to tap into any demand growth,” Natarajan says in a Jan 7 report.

RHB is keeping its “buy” recommendation on ESR REIT with an unchanged target price of 60 cents.

In particular, Natarajan points to ESR REIT’s asset enhancements as well as potential acquisitions as the key drivers ahead.

He notes that ESR REIT is awaiting regulatory approval for the partial redevelopment of 7000 Ang Mo Kio Avenue 5.

“The new industrial space will have a gross floor area (GFA) of close to 270,000 sqft, with an estimated yield-on-cost of around 9%,” Natarajan says. “The site also has an additional 225,000 sqft of unutilised space for future developments.”

The analyst notes that ESR REIT has also identified six other assets for redevelopment, on top of rejuvenation plans for its key assets.

“Overall, we are positive on its redevelopment plans and believe it is a cost-efficient way to unlock unitholder value and future-proof assets,” he adds.

At the same time, Natarajan likes ESR REIT for its potential to “leverage and grow” on the back of its sponsor’s strength.

Sponsor ESR Group is one of the largest Asia Pacific-focused logistics players, with more than US$20 billion ($27 billion) in assets under management.

“The strong sponsor’s expertise should help in terms of operational expertise, and eventually help with overseas market growth at the opportune time,” Natarajan says. “Besides these, the sponsor also has stakes in other industrial S-REITs – which may lead to M&A growth opportunities in the medium term.”

As at 4.35pm, units in ESR REIT are trading half a cent higher at 55 cents.

According to RHB valuations, this implies an estimated price-to-book value (P/BV) of 1.1 times and a dividend yield of 7.5% for FY19F.