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Broker's take: CGS-CIMB upgrades ARA Logos to 'add' citing stronger focus on growth

CGS-CIMB has upgraded its call on ARA Logos Logistics Trust (ALog) to "add", from "hold" previously, and raised its target price on the counter slightly to 71.3 Singapore cents, up from 71 cents. 

This comes amid more earnings clarity and a shift in focus to growth, wrote CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee in a research note on Tuesday.

As at 12.04pm on Wednesday, units in ALog were trading at S$0.59, up S$0.02 or 3.5 per cent. 

The analysts said their recent investor call with ALog suggested that the trust has not seen a large impact from Covid-19 and that the S$2.5 million dividend retained in Q1 should be sufficient.

"ALog is trading at 0.98 times price to book value (P/BV), near 1.5 standard deviation below five-year mean.

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"It offers one of the most attractive yields of over 8 per cent among the real estate investment trusts (Reits) under our coverage. ALog's P/BV discount versus its peers has widened from 4 to 19 per cent in 2019 to 18 to 41 per cent year to date. We think the valuation gap could narrow as uncertainties from Covid-19 subside," said Ms Eing and Ms Lock. 

"We reduce our FY20-21F DPU forecasts by 3 to 12 per cent to reflect the one-month mandatory rental waiver for SMEs (small and medium enterprises) in Singapore, and the retention of S$2.5 million dividend in the last quarter to be conservative," they added. 

In March this year, ALog's major shareholder, ARA Asset Management, acquired a majority stake in Logos - a logistics specialist with operations across the Asia-Pacific and A$10 billion (S$9.68 billion) in property owned and under development.

The analysts are of the view that Logos has a strong pipeline for ALog to tap to drive future growth, and understand that talks on asset monetisation have been ongoing. 

They noted that Logo's large geographical exposure in Australia and Singapore complements ALog's existing presence in both countries.

"ALog has been expanding into Australia aggressively which is seeing strong demand from e-commerce. The ability to make an accretive acquisition, however, depends on ALog's asset recycling capability and share price recovery. To make an accretive acquisition, we estimate that ALog would need to fund a S$300 million deal with 45 per cent debt, assuming an acquisition yield of 6.5 per cent," the analysts said. 

According to CGS-CIMB, ALog's net property income performance in the past five years was affected by the strong warehouse supply in Singapore and the conversion of single-tenant to multi-tenant leases, mainly due to the expiration of master leases inked during the initial public offering (IPO) in 2010.

"We believe these factors are behind ALog. It has also diversified into Australia aggressively to reduce dependency on Singapore since 2015," the analysts said.

As logistics firm CWT ceased to be ALog's shareholder in 2018, ALog lost its right of first refusal on CWT's assets then.

Nonetheless, the analysts noted that the Reit's tapering warehouse supply from an average of 540,000 square metres (sq m) per year, to 140,000 sq m net lettable area over the next four years could support rentals.

Separately on Tuesday, the manager of ALog announced that its chief executive officer (CEO), Daniel Cerf, will be retiring on Aug 14, after nearly 11 years in the position. Karen Lee from Logos will assume the role of CEO of the manager, subject to approval from the relevant authorities. 

"The appointment of one of Logo's management team as ALog's CEO may be a sign of Logo's commitment to ALog," the CGS-CIMB analysts said.

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