Brokers' take: CGS-CIMB raises target price of industry laggard ESR-Reit to S$0.538

CGS-CIMB has reiterated its "add" call on ESR-Reit with a higher target price of 53.8 Singapore cents compared to 52.1 cents previously as it continues to highlight the real estate investment trust (Reit) as a laggard play.

In a research note on Wednesday, the brokerage's analysts said they continue to like the Reit for its healthy operational and financial performance amid Covid-19, recent acquisitions and asset enhancement initiatives (AEI), as well as lower cost of funding which puts the Reit in a better position for accretive acquisitions.

Looking ahead, they are expecting ESR-Reit to benefit from improvements in the industrial leasing market, while delivering flattish rental reversion and stable rental income for the rest of 2021 due to its diversified portfolio.

While CGS-CIMB has reduced the Reit's FY2021-2023 distribution per unit (DPU) estimates by between 0.4 and 3.2 per cent after factoring divestments and delays in AEI, its higher target price for the Reit implies a DPU yield of 5.8 per cent to account for a premium for its inclusion into the FTSE EPRA Nareit index.

Noting that ESR-Reit's unit price has appreciated by 18 per cent in the year to date, the analysts believe its recent inclusion on the index will improve trading liquidity and potentially lower its cost of capital further.

"We expect greater price upside driven by improvements in operating metrics, income contributions from acquisitions/AEIs and a narrowing valuation gap with its peers," said the analysts.

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They remain positive on the Reit for its reduced cost of borrowing as at end-June 2021, with room for even lower cost of debt.

"With the lower cost of funding, we think ESR-Reit - together with its ability to scout for accretive deals in the past and large sponsor pipeline - will be in an even better position to tap on its sponsor's large (more than) US$30 billion pipeline in China, Japan, South Korea, India, Australia and Vietnam and make accretive acquisitions going forward," they added.

Units of ESR-Reit were flat at 46.5 cents as at the midday trading break on Thursday.

Read more: 

• Heavy trading in new S-Reit inclusions in global Reit benchmark

• Eleven of Singapore's smaller Reits enter FTSE EPRA Nareit Global Real Estate Index

• ESR-Reit to raise S$150m as it acquires Singapore, Australia assets