SINGAPORE (June 4): CIMB is maintaining its “add” call on ESR-REIT (EREIT) with a higher target price of 62 cents.
This came on the back of the REIT proposing the first merger in Singapore REIT (S-REIT) history with Viva Industrial Trust (VIT), by way of a trust scheme arrangement.
The scheme consideration payable to VIT unitholders is 96 cents per unit, implying 1.26 times book value.
See: Viva Industrial Trust stapled securityholders to receive 96 cents apiece in proposed merger with ESR-REIT
The scheme consideration will be satisfied via 10% cash and 90% through the issuance of new EREIT units at an issue price of 54 cents per unit, implying a gross exchange ratio of 1.778 times.
In a Friday report, analyst Yeo Zhi Bin says, “We expect the post-merger EREIT to become the fourth-largest industrial S-REIT with a combined AUM of $3 billion. In fact, it would be the largest S-REIT with pure exposure to the Singapore industrial market.”
Including the REIT’s latest potential acquisition of a modern ramp-up logistics facility at 15 Greenwich Drive, it would have a portfolio of 57 properties with a total GFA of about 13.6 million sq ft.
See: ESR-REIT acquires modern ramp-up logistics facility for $95.8 mil
Following the merger, high specs industrial and business parks would form about 46% of the REIT’s AUM and the analysts estimates its gearing to increase to about 40% at end-FY19. Tong Jinquan will own around 33.8% of the enlarged trust, while ESR will own about 9.1%.
“For simplicity, we incorporate the merger on ‘day one’ of FY19. Propelled by the addition of VIT as well as an expected bottoming in the Singapore industrial market, we now forecast FY19 DPU to expand by 12.8% y-o-y,” says Yeo.
The analyst sees FY18 as a “work-in-progress” period for the REIT, as additions to the portfolio are counteracted by on-going weakness and capital management actions. He also expects FY18 DPU to drop by 6.3% y-o-y.
With the merger, the EREIT will be joining the “big league” of large-cap S-REITs, which the analyst believes will cause it to be re-rated closer to its large-cap peers.
“Furthermore, we believe that EREIT would be able to narrow the large-small issuer credit spread,” adds Yeo.
However, the merger may be yield-accretive for EREIT, but it is NAV-dilutive.
The income support for VIT’s UE BizHub East expires in Nov 2018. That said, organic improvements from UE BizHub East as well as Viva Business Park would partially make up for the absence of income support in FY19.
Also, the underlying land leases at VIT’s Viva Business Park and Jackson Square are short, though successful land lease extensions may unlock value in VIT.
As at 10.30am, units in EREIT are trading at 50 cents, or 1.02 times FY19 book with a dividend yield of 7.97%.
