SINGAPORE (May 24): OCBC Investment Research is maintaining its “neutral” call on Singapore industrial REITs with the recommendation to switch holdings to Viva Industrial Trust (VIT) from Cache Logistics Trust (CLT).
While VIT has been rated “accept offer” at a fair value of 90 cents, CLT is kept at “hold” with a fair value of 83 cents.
The research house is particularly positive on the proposed merger between VIT and ESR-REIT, as it finds the offer conditions of 9.6 cents cash and 1.6 new ESR-REIT units for each VIT unit held attractive for VIT unitholders.
See: Warburg Pincus-backed REIT to buy rival in Singapore's first REIT merger
In a Thursday report, lead analyst Deborah Ong estimates that the fair value of the new ESR-REIT units of the merged entity should lie at about 53 cents each, 4% above that of ESR-REIT’s closing price of 51 cents on Wednesday.
While this estimate falls below the current Bloomberg consensus fair value estimate of 59 cents for standalone ESR-REIT units, the analyst sees positive catalysts from the merger, namely a price-to-book revaluation, as well as operational and financial synergies.
“Overall, our estimate [of 53 cents] translates into an aggregate value of at least 94.2 cents – including the 9.6 cents in cash – for each VIT unit, which is ~6% above VIT’s closing price of 88.5 cents as at 23 May. While we do not cover ESR-REIT, we believe their unitholders also stand to benefit from the merger,” says Ong.
Specifically, she sees the potential for an upward revaluation of the combined entity such that it could trade at around 1.25 times P/B, around 10% higher than the 1.14 times P/B at OCBC’s 53-cent estimate currently implies.
“Should the merger be successful, the new entity will become the fourth largest industrial S-REIT by asset size. By virtue of its size alone, we see the potential for an upward revaluation of the REIT post-merger. As at 23 May’s close, large-cap industrial REITs are trading at higher P/B valuations (1.10 times to 1.33 times) compared to small to mid-cap industrial REITs (0.72 times to 1.17 times),” notes the analyst.
“In terms of asset size and portfolio composition, we believe the closest comparable for the enlarged ESR-REIT would be Mapletree Industrial Trust (MINT). Notwithstanding this, investors’ familiarity with Mapletree vs. Warburg Pincus-backed ESR may mean that the merged entity could trade at a discount relative to MINT’s P/B valuation of 1.33 times,” she adds.
Ong is also positive on Soilbuild Business Space REIT and rates it “buy” at a fair value of 71 cents, although she sees fewer catalysts in the near horizon compared to VIT.
Units of VIT are trading flat at 88 cents as at 2:36pm, or a P/B ratio of 1.16 times.
