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Broker's take: OCBC initiates coverage on ESR-Reit with 'buy'

OCBC Investment Research initiated coverage on ESR-Reit (real estate investment trust) on Friday with a "buy" call and S$0.59 target price, noting its low valuation compared to peers with similar-sized portfolios.

ESR-Reit's portfolio size grew to S$3.1 billion from S$1.7 billion after the Reit merged with Viva Industrial Trust in October, making it the fourth-largest Singapore-listed industrial Reit and the largest with an entirely Singapore-focused portfolio.

However, OCBC analyst Deborah Ong observed that ESR-Reit is trading at a low 0.9 times FY19F price/book (P/B) and offering a 7.8 per cent FY19F dividend yield. Meanwhile, peers with large portfolios of more than S$2 billion are trading at an average P/B of 1.19 times and an average dividend yield of 6.5 per cent.

Units of ESR-Reit were trading flat at S$0.50 as at 3.23pm on Friday.

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In her report, Ms Ong listed three benefits of the merger that OCBC believes the market has yet to fully appreciate. First, the larger portfolio cushions ESR-Reit against events like sudden tenant defaults, master lease conversions and any fall off in income support. Second, the Reit now has access to a greater pool of financing options and potential to refinance at lower costs. Third, more institutional investors should now consider ESR-Reit an investable asset with its greater liquidity and larger market cap of more than US$1 billion.

"We believe it is an opportune time to gain exposure to the Singapore industrial space through the Reit," wrote Ms Ong. "While we are wary of the back-end loaded supply injection expected in Q4 2018 (518,000 square metres of new industrial space), we believe the relatively slower pace of supply increase from 2019 to 2022 will lead to a better demand-supply situation as well as a further improvement in rents."

Average demand and supply for industrial space from 2015 to 2017 were 1.2 million sq m and 1.6 million sq m respectively, while the average annual supply for 2019 to 2021 is forecast at 1.0 million sq m.