Broker's take: ARA Logos likely has growth levers in S'pore, Australia; merger with ESR-Reit possible
ARA Logos Logistics Trust (ARA Logos) K2LU will likely see growth from strong leasing enquiries at its Singapore and Australia portfolios, but it may also be a takeover target of ESR-Reit, UOB Kay Hian (UOBKH) said on Friday.
The real estate investment trust (Reit) has "twin engines of growth", said analyst Jonathan Koh. He expects its Singapore portfolio will benefit from growth in third-party logistics and e-commerce sectors, while demand for its Australia portfolio could also be boosted by omni-channel retailers.
UOBKH maintained its "buy" call on the stock, and raised its target price to S$1.07 from S$1.02, noting that the Reit will likely provide an attractive distribution yield of 6 per cent for 2022.
Units of ARA Logos closed unchanged at S$0.905 on Friday.
Koh had raised estimates for ARA Logos' distribution per unit for 2022 by 2.6 per cent on higher occupancy in Singapore, noting that the higher unit price also lowers dilution from paying management fees through the issue of new units.
He also expects the capitalisation rate of the Reit's Australia portfolio to drop to 4.5 per cent from 5.1 per cent, which would increase its net asset value per unit by 7 per cent by Dec 2021. A lower capitalisation rate - an indicator for the expected rate of return generated on a real estate investment property - means better valuation and prospect of returns with lower risks.
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Additionally, Koh noted that ARA Logos has actively worked on potential acquisitions, which could involve properties in Singapore and Tier-2 cities in China. Even on the fundraising end, the Reit's distribution yield has compressed to 5.6 per cent from 8.1 per cent earlier this year, which makes equity fundraising to finance acquisitions more feasible.
ARA Logos, however, could be taken over by ESR-Reit, after ESR Cayman - which owns 67 per cent of ESR-Reit's manager - completes its acquisition of ARA Asset Management, a majority shareholder of ARA Logos' manager.
In August, Hong Kong-listed ESR Cayman said that it would buy the entire share capital of ARA Asset Management for US$5.2 billion, resulting in it indirectly owning the manager of ARA Logos.
ESR-Reit J91U , which is pivoting its investment strategy towards acquiring logistics assets, would therefore likely issue a takeover offer for ARA Logos due to their overlapping investment mandates, given that the former is also 1.4 times larger in terms of market capitalisation, according to UOBKH.
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