SINGAPORE (Oct 19): CIMB Research is maintaining its “hold” call on ESR-REIT while raising its target price estimate of 57 cents from 56 cents previously on the belief that the REIT’s financial performance is bottoming out, as seen by its latest 3Q results.
See: ESR-REIT 3Q DPU falls 2.3% to 0.964 cents
In a Tuesday report, analyst Yeo Zhi Bin says he expects a slightly weaker 4Q ahead due to the trust’s divestments in the same period; lower occupancy at 3 Pioneer Sector 3; as well as the income void at 21B Senoko Loop following the pre-termination of Tellus Marine which took place in 2Q17.
ESR-REIT’s 3Q DPU came in within CIMB’s expectations, with the narrowing of its quarterly DPU decline to low-single digit from double digits in the past quarters indicating that the REIT is reaching in inflection point, in CIMB’s view.
The analyst has therefore reduced his FY18-19F distribution per unit (DPU) estimates by 0.1%, as he believes the absence of income from the divestments should be offset by lower borrowing costs.
Looking ahead, Yeo believes ESR-REIT’s divestments of 23 Woodlands Terrace and 87 Defu Lane 10, which are expected to complete in 4Q17, could help to further improve the trust’s balance sheet.
He also notes that the REIT is at the tail-end of its multi-tenanted building (MTB) conversion, with only 12% of its portfolio representing single tenanted buildings (STB) expiring up to FY19F.
“Management continues to scour for acquisition opportunities to take ESR-REIT to the next growth stage. We believe what it does next would have a significant bearing on unit price (from both upside and downside perspective). Until then, we believe that the unit price would trade sideways,” says Yeo.
See: ESR-REIT acquires Hyflux's Tuas facility for $111 mil in sale and leaseback deal
As at 1pm, units in ESR-REIT are trading 1 cent lower at 57 cents, 0.92 times FY18 book value.