Analysts from RHB Bank Singapore and DBS Group Research are lowering their target prices for Cromwell European REIT (CEREIT), following the REIT’s 1HFY2024 ended June 30, which saw a 9.5% lower y-o-y distribution per unit (DPU) of 7.05 Euro cents (10 cents).
However, with increasing odds of interest rate cuts, and the REIT’s gearing that has been “kept under control”, both brokerages are keeping their “buy” calls on the REIT. RHB’s Vijay Natarajan is lowering his target price to EUR1.90 from EUR2.05 previously, and DBS’s Dale Lai and Derek Tan have lowered their target price to EUR1.90 from EUR2 previously.
Natarajan notes that the REIT’s DPU decrease is mainly from the absence of contributions from three assets sold, as well as higher interest expenses.
Natarajan from RHB says that CEREIT’s valuations are stabilising, with headline portfolio asset values rising 0.6% h-o-h, but a small loss in capex is included. He notes that improvement came mainly from the logistics portfolio, and from Denmark and Italy while Finland and Poland office assets saw declines in values.
The REIT’s management trimmed its divestment target ahead to EUR90 million, with Finland and Poland office assets likely being the near-term potentials, in anticipation of interest rate cuts.
On portfolio occupancies, the analyst notes that the REIT’s occupancy rose 20 basis points (bps) q-o-q to 93.6% mainly due to Nervesa21 achieving full occupancy. Rent reversions eased to more flattish levels in 2Q indicating some softness setting in, particularly on the logistics portfolio on the back of normalising of demand post COVID-19.
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Natarajan mentions that he is positive on a new sponsor commitment to CEREIT. Stoneweg most recently acquired about 28% stake in the REIT at 10% premium to current share price and the REIT manager’s stake.
It funds logistics/industrial in harder-to-penetrate markets like Switzerland, and has last-mile logistics assets in Europe, which in the medium-term could act as potential pipeline assets for CEREIT, the analyst adds.
Natarajan lowers his FY2024-FY2026 DPU forecasts by 7%, 10%, and 12% respectively, by adjusting tax assumptions for current year and revising net property interest margins and higher financing cost assumptions for FY2025-FY2026 by 60-70bps as he factors in higher cost for replacement of its EUR 450 million bonds expiring next year.
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The analyst has a lower target price of EUR1.90.
Likewise, Lai and Tan from DBS note that CEREIT is currently undergoing a portfolio repositioning, pivoting its exposure towards lighter industrial/logistics assets.
The analysts note that CEREIT is navigating a slowing European economy. While it has weathered the Covid-19 pandemic well, Europe is expected to face a period of low growth and high inflation due to the ongoing geopolitical crisis, they say.
The REIT’s focus in France, Germany, Italy and the Netherlands, which form about 71% of the portfolio and have relatively better fundamentals, will result in more resilience going forward, they add.
Additionally, the consumer price index-pegged rental escalations in place for its leases will drive steady organic income growth.
With the REIT’s pivot to focus more on the logistics sector, Lai and Tan believe that this will drive earnings resilience. They anticipate a compression in yields due to the REIT’s improved earnings visibility and growth profile.
Their lowered target price of EUR1.90 is based on a discounted cash flow valuation with a weighted average cost of capital of 6.4% (risk-free rate of 3.5%), which implies a target yield of more than 7% over the next three years.
As at 4.06pm, units in CEREIT are trading 2 Euro cents lower or 1.4% down at 1.41 Euro cents.
