Brokers' take
ESR-Reit | Buy Target price: S$0.59 Sept 17 close: S$0.50 DBS Group Research, Sept 17
We maintain buy with lower target price of S$0.59. Post consolidation, ESR-Viva will emerge as the fourth largest industrial real estate investment trust (Reit) with around S$3 billion (+79.8 per cent) in assets. The implied acquisition yield of 5.8-5.9 per cent for Viva Industrial Trust's (VIT) portfolio is at the lower end of peers' range of 5.1-6.8 per cent, possibly reflecting the acquirer's optimism over longer term prospects and synergies.
While paying a 26.4 per cent premium to VIT's net asset value (NAV) appears high, we believe that benefits from the injection of VIT's higher-quality portfolio (including lower financing costs and trust-level saving) and merits of an enlarged vehicle should prevail.
Within ESR and VIT's respective asset portfolios lie untapped potential - including at least two assets with unutilised gross floor area and several others with potential for conversion into higher-spec facilities.
One of the immediate benefits from the merger would be the enlarged Reit's ability to be more active on this front, driving shareholder value. Meanwhile, unfavourable rental reversions resulting from the ongoing conversion of tenancy may bring downside surprises.
DBS | Buy Target price: S$30.30 Sept 17 close: S$24.79 RHB Research Institute, Sept 17
We remain bullish on DBS, with an unchanged target price of S$30.30 giving 22 per cent upside. We believe the key catalyst for the stock is the US federal funds rate's rising trend, widening DBS' net interest margin. After the early July property cooling measures, subsequent show-flat visits by potential buyers suggest good demand for upcoming launches as developers lower selling prices - this should support mortgage loan demand.
DBS' capital adequacy ratio should also be strengthened by the recent raising of its Additional Tier 1 capital. In early September, DBS priced its S$1 billion, 3.98 per cent perpetual capital securities first callable in 2025 to qualify as Additional Tier 1 Capital.
The impact of property cooling measures may also be subdued. Recent new property show-flat visits (such as JadeScape), however, point to continued interest from potential buyers, as indicative prices were lowered by around 10 per cent.
Our long-term return on equity (ROE) assumption is 13.8 per cent, premised on gains from DBS' digital strategy and nationwide digital strategies such as the Monetary Authority of Singapore-driven Paynow.
Management guided for ROEs of 13-14 per cent, with 14 per cent being achievable if costs are well controlled.
Compiled by Wong Kai Yi
Disclaimer: All analyses, recommendations and other information herein are published for general information. Readers should not rely solely on the information published and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.
