Broker's take: CGS-CIMB calls Lendlease Global Reit undervalued, initiates coverage

CGS-CIMB has called Lendlease Global Commercial Reit an undervalued real estate investment trust (Reit), initiating coverage with "add" and a target price of S$0.85, in a research note on Wednesday.

The research team believes the Reit is a domestic recovery proxy for Covid-19, with an upside of 30.3 per cent from acquisitions and asset enhancement initiatives.

CGS-CIMB also sees limited downside risks to its fiscal 2021 forecast dividend yield of 6.6 per cent with Lendlease Global Reit's 100 per cent committed dividend payout. Downside risks include slower recovery from the Covid-19 pandemic, and single-tenant risk exposure in Sky Complex.

Units of Lendlease Global Reit were trading up 0.5 Singapore cent or 0.8 per cent to 66 cents as at 1.04pm on Thursday.

CGS-CIMB analysts Eing Kar Mei and Darren Ong believe fiscal 2021 would be a "fresh start" for Lendlease Global Reit as it has factored in all potential Covid-19 impact in fiscal 2020. They expect footfall to gradually recover, they said.

Both of the Reit's assets - 313@somerset and Sky Complex in Milan - are leased at "attractive" rental rates compared with the market rate, the analysts wrote. This, coupled with Sky Complex's long lease structure and a rental escalation from about 91 per cent of the Reit's net lettable area, provides strong support to its income, the analysts said.

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They noted that the Reit is trading at an attractive 0.77 times fiscal 2020 price-to-book ratio, versus a sector average of 0.9 times. The Reit's gearing also remains healthy at 35 per cent, with strong interest coverage at nine times compared with between four and six times for its peers, providing inorganic growth flexibility.

The Reit's strong balance sheet supports inorganic opportunities. Ms Eing and Mr Ong believe Jem mall - which is owned by the Reit's sponsor - could be the next target for acquisition. The sponsor, Lendlease Corporation, granted Lendlease Global Reit the right of first refusal for its assets.

CGS-CIMB said there are also opportunities to unlock the unutilised 10,850 square feet (sq ft) of gross floor area in 313@somerset. Despite challenges posed by Covid-19, the mall is in a better position compared with other malls on Orchard Road, due to its lower rental rate, strategic location and lower reliance on tourist shoppers as it targets the mass market, the research team said.

The mall also has significantly lower income contribution from the more vulnerable fashion-related sectors compared with its listed peers on the shopping belt.

The Reit's rental reversion has remained relatively healthy, with fiscal 2020's passing rent hovering at about S$17 per sq ft per month, similar to pre-Covid-19 levels, the analysts said.