Maybank Kim Eng started ESR-REIT at Buy, with a S$0.55 target price, noting its unit-price rally has lagged behind other REITs with exposure to logistics and high-spec assets, leaving it ripe for a re-rating.
ARA Logos Logistics Trust and AIMS APAC REIT have risen around 49 percent and 24 percent, respectively, year-to-date, while ESR-REIT is up only around 15 percent despite nearly half its gross rental income coming from logistics and high-spec assets, the brokerage said in a note Monday.
“We believe this disparity in returns is unjust. In our view, the market has overlooked an incoming logistics star and is unduly hung up on its general industrial and business park exposure,” Maybank Kim Eng said. “We argue that negative perception of its general industrial segment is overplayed and that business park downside risks are largely priced in.”
The note said second-quarter general industrial sector data suggest early signs the segment is bottoming out, with average factory rents up 0.4 percent on-year in the quarter, the first time since 2013. ESR-REIT’s positive general industrial reversions over the past two quarters may indicate the segment could surprise on the upside, Maybank Kim Eng said.
“For its business parks, we acknowledge that latest data and results commentary suggest for the segment to be tested over the next two years. However, we find that a decent amount of downside has already been priced in,” the note said.
Maybank Kim Eng said it was most optimistic on ESR-REIT’s prime-logistics assets, which it estimated would contribute around 15-16 percent of gross rental income over 2021-2023, with accelerated e-commerce adoption and healthy physical commodity demand set to drive strong rental reversions.
For high-spec industrial exposure, the brokerage estimated the REIT’s gross rental income exposure to the segment would reach 19.8 percent by 2023.
In addition, the brokerage pointed to a high probability the REIT will be included in the NAREIT index in September, strong logistics sector tailwinds and an attractive distribution per unit (DPU) profile, with an attractive 6.5 percent yield this year.
The REIT’s sponsor, ESR Cayman, is “formidable” and is about to become the largest Asia-Pacific real asset fund manager after its proposed acquisition of ARA Asset Management, the note said.
“In our view, the deal only enhances EREIT’s long-term growth prospects given a more robust acquisition pipeline,” Maybank Kim Eng said.
ESR-REIT units were up 3.26 percent at S$0.475 at 1:11 p.m. SGT.