ESR-LOGOS REIT - Sized Up For Growth
- At FY22F DPU yield of 7.3%, ESR-LOGOS REIT (SGX:J91U) ranks as one of the most attractively valued industrial S-REITs in our coverage. We believe that the market has not recognised the benefits of the transformative merger that includes a 60% expansion in market cap to S$2.7bn as at Jul 2022, with higher trading liquidity and greater index representation as well as the future-proofing of its portfolio via greater geographic and sub-sector diversity.
- Post the merger with ARA LOGOS Logistics Trust (SGX:K2LU), a sizeable 52.3% of ESR-LOGOS REIT’s expanded portfolio income is derived from the more resilient logistics/warehouse sector in Singapore and Australia while extension of the average underlying land tenor of its portfolio has increased NAV robustness. That said, Singapore remains a significant 71% of AUM, thus limiting forex volatility.
- Other benefits of the merger include a strengthening of credit metrics post refinancing, with 64bp savings in average all-in funding costs to 2.7% vs 3.34% in 1Q22. We believe ESR-LOGOS REIT’s larger portfolio and strong sponsor backing will provide the REIT the added advantage of diversified funding sources.
- ESR-LOGOS REIT is also reviewing options to obtain a credit rating to further lower funding costs from the debt and capital markets, which will stand it in good stead in the current rising interest rate environment. We preemptively bake in an additional 15-25bp increase in overall funding costs into our FY22-24F estimates. A further 25bp jump in funding cost could erode ESR-LOGOS REIT’s DPU by 0.05 cents or 1.6%.
- With its sponsor ESR Group’s asset base of US$59bn and executable pipeline of US$2bn of assets in Asia Pacific, we believe ESR-LOGOS REIT has ample opportunities for acquisition growth. Based on a post-merger gearing of 40.8%, it has potential debt headroom of S$941.9m.
- ESR-LOGOS REIT has also earmarked S$450m worth of assets to be recycled over the next 12 months and proceeds can be redeployed into new opportunities. If divestments happen earlier, this could lower gearing to ~35%, a comfortable level to tap acquisition opportunities.
- In order to boost returns from its current portfolio, ESR-LOGOS REIT has identified ~S$110m worth of asset enhancements to be completed over the next 2-3 years. Based on projected returns of 6- 7%, these initiatives could lift NAV by ~1%, further easing gearing.
- Reiterate ADD with a higher DDM-based target price of S$0.51 for ESR-LOGOS REIT. Our target price implies a 5.9% FY22F DPU yield, which is midway between its average and +0.5 standard deviation historical yield range.
Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.
LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2022-07-26 2022-07-26
Previous report by CGS-CIMB:
2022-04-28 ESR-REIT - Near-Term Cost Hiccup, Growth Plans Intact
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