Brokers' take: Analysts raise targets for ARA Logos after Australia portfolio acquisition

GROWING demand for logistics assets could boost units of ARA Logos Logistics Trust K2LU (ALog), brokers said.

On Friday, both RHB and DBS raised their target prices for the logistics trust. CGS-CIMB had raised its target on Thursday.

Units of ALog, which closed at 89.5 Singapore cents on Friday, could rise to as much as S$1, according to DBS.

The brokerage has a "buy" call for ALog, and previously had a target of S$0.85.

RHB, which also has a "buy" call, raised its target to S$0.95 from S$0.85 previously. CGS-CIMB, which rates ALog an "add", raised its target to 96.1 cents from 81.4 cents previously.

ALog on Thursday reported a 10.6 per cent increase in its distribution per unit (DPU) for H12021 results, from 2.323 cents to 2.57 cents.

The increase came despite an enlarged unit base following the issuance of new units for the trust's maiden Australian portfolio acquisition from sponsor Logos.

The new property helped boost revenue for the half-year period, which rose 15.2 per cent to S$66.6 million. Net property income (NPI) grew 17 per cent year on year to S$51.4 million.

Analysts, however, honed in on the compression of capitalisation rates thanks to strong demand for logistics assets. The value of ALog's portfolio has risen year on year.

Demand has been particularly strong for cold storage logistics facilities, which contributed 9 per cent of the trust's revenue in FY2020. According to RHB, ALog's proportion exposure to the cold storage segment of the market is the largest among its peers.

At the same time, units of ALog have been on a tear. They are up 46.3 per cent this year, putting ALog's historical distribution yield at 5.5 per cent.

The improved valuation should make it easier for ALog to acquire yield-accretive properties.

RHB added in its report that ALog's increased size and strong sponsor support should allow it to "score larger portfolio deals" of S$200 to S$500 million.

DBS, meanwhile, predicted that ALog would shift its focus to its sponsor's pipeline assets in Singapore and China, where cap rates stand at the 5-6 per cent levels and are conducive for accretive acquisitions.

ALog's portfolio occupancy rate recorded a slight dip to 98.2 per cent at the end of Q2, from 99.1 per cent at end-Q1. But the analysts all project the occupancy rate to pick up by the end of this year.

"As the pandemic continues to run its course, the logistics sector benefits from the growth of the e-commerce and third-party logistics sectors," said DBS in its report.

It added that the outperformance of the logistics segment is evident in the increase in ALog's portfolio occupancy rates by almost 3 per cent since the beginning of FY2020.

On the environmental, social and governance issues front, CGS-CIMB said ALog has improved its disclosures in its annual sustainability reports. The brokerage noted that the trust was named "Singapore Corporate Renewable Energy Company of the Year" by Frost & Sullivan for its Commodity Hub rooftop solar farm.

The research team qualifies this, however, by noting that only one of its properties has been certified for real estate sustainability. A delay in securing certifications for its properties compared to its peers may pose a drag on its valuations, they said, although the analysts did not apply a discount to theirs.

They also noted that emissions-wise, ALog has been making efforts to reduce carbon emission intensity and increase green energy consumption. It saw declines in total energy intensity and indirect greenhouse emissions from FY2018 to FY2020.

READ MORE: ARA Logos H1 DPU up 10.6% to 2.57 S cents on revenue from Australia acquisition


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