Brokers' take: CGS-CIMB raises ESR-Logos Reit target on post-merger benefits

CGS-CIMB has raised its target price on ESR-Logos Reit to S$0.51 from S$0.474 and reiterated its “add” call on the industrial real estate investment trust (Reit).

The research team ranks the Reit as “one of the most attractively valued” industrial S-Reits in its coverage with a FY2022 distribution per unit (DPU) yield of 7.3 per cent, versus a peer average of around 6 per cent, according to a report dated Jul 25.

Furthermore, CGS-CIMB believes the market has not recognised the benefits of the merger of ESR-Reit and Ara Logos Logistics Trust to form ESR-Logos Reit.

This includes a 60 per cent expansion in market capitalisation to S$2.7 billion as at July 2022, higher trading liquidity and more index representation. The merger also allowed for future-proofing of the Reit’s portfolio via greater geographic and sub-sector diversity, according to CGS-CIMB analyst Lock Mun Yee.

Her new target price of S$0.51 represents a potential upside of 22.9 per cent from the counter’s last trading price of S$0.415 as at 10.52 am on Tuesday. The counter was trading 1.2 per cent or S$0.005 higher at the time.

Post-merger, a “sizeable” 52.3 per cent of ESR-Logos Reit’s expanded portfolio income was from the logistics or warehouse sector in Singapore and Australia, which is seen as more resilient, the research team said.

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Extending the average underlying land tenor of the Reit’s portfolio has also increased net asset value robustness. That being said, the Singapore market remains a “significant 71 per cent” of assets under management, limiting foreign exchange volatility.

Noting potential upside from inorganic growth drivers, the research team believes ESR-Logos Reit has ample opportunities for acquisition growth, with potential debt headroom of S$941.9 million based on a post-merger gearing of 40.8 per cent.