Brokers’ take: RHB lowers ESR-Logos Reit’s target price to S$0.40, keeps ‘buy’ call

RHB Research has lowered its target price for ESR-Logos Reit to S$0.40 from S$0.45, but maintained its “buy” call on the real estate investment trust (Reit). 

This comes after the research company lowered its distribution per unit (DPU) estimates for FY2023 to FY2025 by 3 to 5 per cent. The research team factored in the recent equity fundraising that resulted in temporary earnings dilution for the Reit, it said in a report on Tuesday (Jun 13). 

“However, this strengthened its balance sheet against an uncertain macro backdrop,” said RHB analyst Vijay Natarajan. 

He remains positive on the mid- to long-term strategy portfolio plans for the Reit. He noted that the Reit is progressing with the redevelopment plans for three of its industrial assets, and plans to convert a logistics asset into a cold-storage logistics facility.

The Reit’s divestment plans are still ongoing, and due diligence is being carried out on its assets exclusively by a potential buyer. Natarajan believes the divestment will be done closer to book value or at a slight discount. 

“We believe ESR-Logos Reit will likely use the proceeds to acquire assets from its sponsor’s pipeline, potentially in Singapore, where Logos has a few modern logistics assets,” RHB said.

Coupled with the Reit’s recent equity fundraising of S$300 million via private placements and preferential offerings, RHB estimates gearing to fall below 35 per cent, offering more than S$500 million in debt headroom.

RHB is also expecting positive rental reversions of 6 to 8 per cent for FY2023, driven by the high-specifications and logistics assets in the Reit’s portfolio, where demand remains resilient and is outpacing supply.

Although the Reit’s portfolio occupancy dipped 0.6 percentage points quarter-on-quarter to 92.1 per cent in Q1, due to the non-renewal of some assets, RHB still projects the overall occupancy level to remain stable. 

SEE ALSO

Key ESR-Logos Reit tenant renews lease at 20% increase

ESR-Logos Reit Q1 net property income up 78.2% to S$70.4 million

While rising rates are of concern, RHB expects the capitalisation rate (cap rate) for Singapore industrial assets to remain stable, in line with continued investor demand. 

Cap rates for the Reit’s Australian portfolio are likely to expand by 50 to 75 basis points. RHB anticipates the impact on valuation to be offset by the stronger rental growth for logistics assets due to increasing demand. 

As at 3.50 pm on Wednesday (Jun 14), ESR-Logos Reit’s units were trading 3.2 per cent or S$0.01 higher at S$0.32.