Brokers' take: Maybank KE initiates coverage on industrial laggard ESR-Reit at 'buy'

MAYBANK Kim Eng has initiated coverage on ESR-Reit J91U with a "buy" recommendation and a target price of S$0.55.

This implies an upside of 20.9 per cent from its last closing price of 45.5 Singapore cents on Friday.

"In our view, the market has overlooked an incoming logistics star and is unduly hung up on its general industrial and business park exposure," said analysts Matthew Shim and Chua Su Tye in a report on Monday.

"(The) negative perception of its general industrial segment is overplayed and (we believe) that business park downside risks are largely priced in," they added.

In addition, the analysts forecast that 41 per cent of ESR-Reit's gross rental income for FY2021 will be derived from its logistics and high-spec assets instead.

"Going forward, we anticipate that accelerated e-commerce adoption and healthy physical commodity demand will drive strong rental reversions within the (prime logistics) segment and will eventually catch the attention of investors going into 2022," the analysts said.

The way the analysts describe it, ESR-Reit is a "laggard" compared to similar small and mid-cap industrial real estate investment trusts with exposure to logistics and high-spec assets.

They noted that, year-to-date, the counter is trading 15 per cent higher, while ARA Logos Logistics Trust and AIMS APAC Reit are up around 49 per cent and 24 per cent, respectively.

"We believe this disparity in returns is unjust," Mr Shim and Mr Chua said.

The pair subscribe to the view that ESR-Reit is "ripe for a re-rating" going forward, with a "high probability" for inclusion in one of FTSE's EPRA Nareit Global Real Estate indices in September, strong logistics sector tailwinds, and an attractive distribution per unit (DPU) profile.

"Investors buying in at (the current) level would be well-positioned to capitalise on a potential re-rating, whilst being paid an attractive 6.5 per cent yield to wait," the analysts said.

For the first-half ended June 30, ESR-Reit reported DPU of 1.554 Singapore cents, up 14.3 per cent from 1.359 cents in the year-ago period.

Gross revenue was up 5.4 per cent to S$119.8 million, from S$113.8 million a year ago, due to the absence of provisions for Covid-19 rental rebates as well as lower property expenses; while net property income grew 8.4 per cent on the year to S$87 million for the half-year, from S$80.2 million.

Meanwhile, the analysts are bullish on the proposed US$5.2 billion acquisition of real estate fund manager ARA Asset Management by ESR-Reit's sponsor, ESR Cayman, to create the world's third-largest listed real estate asset manager.

"In our view, the deal only enhances ESR-Reit's long-term growth prospects given a more robust acquisition pipeline. We expect minimal immediate term impact to operations but would not rule out potential for further corporate activity in this space," the analysts said.

Units of ESR-Reit closed 1.1 per cent or S$0.005 higher at S$0.46 on Monday.

READ MORE

• Hong Kong's ESR to buy ARA for US$5.2b to create world's third-largest listed real estate asset manager
• ESR-Reit H1 DPU up 14% to 1.554 Singapore cents
• ESR-Reit drops as much as 9.8% after proposed acquisitions, fundraising