RHB Bank Singapore analyst Vijay Natarajan has maintained his “buy” call on Cromwell European REIT (CEREIT), but lowered his target price to EUR2.10 ($3.07) from EUR2.15 previously.
This follows the REIT’s 3QFY2023 ended Sept 30, which the analyst says was a “good quarter of financial and operational numbers that met expectations”.
Natarajan notes that CEREIT’s portfolio occupancy remained high with healthy double digit rent reversions in 3QFY2023 and positive guidance. Its gearing has fallen to more comfortable levels on the back of its active divestment efforts.
“Valuation decline is likely to be marginal in our view and the stock remains deeply undervalued at more than 40% discount to book value,” he says.
The REIT’s operational expense rose 14% q-o-q on the back of provisions for rental adjustment claims by the Italian government and higher service charge expenses. But this was more than offset by the 9% q-o-q decline in finance cost, on the back of loan repayments and release of tax accruals previously made in the Netherlands, resulting in a higher distributable income, says the analyst.
In 2023, CEREIT divested two Italian assets for EUR188 million and the proceeds used to pay down its higher cost revolving credit facilities.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
This will result in a proforma net gearing decline to 37.4%, according to Natarajan. “We like management’s strategy of recycling its non-core assets and redeploying into higher yielding asset redevelopments/enhancements in a current high interest rate environment,” says the analyst.
He notes that the redevelopment of Nervesa is progressing well with about 70% pre-let ahead of
its planned completion in 1QFY2.
As such, Natarajan lowered his FY2023-FY2025 distribution per unit to 3%-5%, by fine tuning his finance cost, net property income margin assumptions, and expectation of lower capital top up.
See also: UOBKH calls Centurion Corp a stock for ‘growth-minded investors’
The REIT’s more transparent data disclosure and active sustainability efforts has led the RHB analyst to raise his environmental, social and governance (ESG) score to 3.3. This results in a 6% ESG premium to his dividend discount model-derived target price.
Units in CEREIT closed 1 EUR cent lower of 0.77% down at EUR1.29.
