RHB Group Research analyst Vijay Natarajan has recommended unitholders of ARA LOGOS Logistics Trust (ALOG) “take profit” with an unchanged target price of 95 cents representing a yield of 6%.
Natarajan’s report on Jan 24 comes after both REIT managers jointly announced that ESR-REIT will pay a higher scheme consideration of 9.7 cents in cash for each ALOG unit on Jan 22.
The rest will be paid in 1.7729 new ESR-REIT units at an issue price of 49.24 cents per unit.
This is in comparison to the previous consideration of 9.5 cents cash, and the allotment and issuance of 1.6765 new ESR-REIT units at 51 cents per unit.
The revised consideration is 2.1% higher in terms of the cash consideration and 5.8% in terms of the consideration units for ALOG unitholders.
Based on the last closing price of ESR-REIT as at Jan 24, the deal values ALOG higher at 93 cents and corresponds to 1.4 times its price-to-book (P/BV).
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“The higher offer price comes on the back of proxy advisors noting that the earlier scheme price was not compelling for ALOG,” writes Natarajan.
The way Natarajan sees it, the revised offer price is “more compelling” and it “addresses pricing concerns raised by proxy advisors and some minority unitholders”.
“We recommend unitholders to accept the offer as we believe the combined entity will be in a much better position to tackle the rate hike environment and tap on the sponsor’s huge pipeline for growth,” he adds.
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The merger is also “imperative” for the REIT’s long-term growth, with the key factor driving the merger being the recent acquisition of ARA Asset Management by ESR REIT’s sponsor, ESR Cayman.
ARA Asset Management, in turn, holds a majority stake in ALOG’s sponsor, LOGOS Group.
“The entry of LOGOS has been a key rerating factor for ALOG in 2021, making it the best performing S-REIT (total return: +60%) last year. However, with the acquisition of the sponsor group by ESR, we believe the two standalone REITs will face a conflict of interest from overlapping acquisition mandate, and will not be able to reap the benefits of strong sponsor pipeline,” says Natarajan.
“This, in turn, will erode the current premium to book value ascribed by the market, in our view, and likely cause a share price derating. Thus, we recommend unit holders to vote in favour of the deal. Alternatively, unitholders who remain unconvinced should lock in their profits post a strong rally last year,” he continues.
Furthermore, Natarajan sees the proposed merger terms as being “highly accretive” to ALOG’s distribution per unit (DPU) and net asset value (NAV).
Should the merger take place in FY2022, pro forma DPU accretion would’ve ben at 12.8%, which is the highest uplift in DPU across all completed Singapore REIT (S-REIT) mergers, notes the analyst.
“Gearing of the combined entity will stand at 42.1% (versus ALOG’s 37.8%) but still manageable, in our view, considering the enlarged size and scale of the combined entity,” he continues.
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Unitholders will still be entitled to receive dividends from ALOG’s FY2021 results up until the date of the merger, if successful.
In the late hours of Jan 25, ALOG reported a distribution per unit (DPU) of 2.464 cents for the 2HFY2021 ended December 2021, down 15.8% y-o-y due to a larger unit base.
ALOG’s DPU for the FY2021 fell 4.1% y-o-y to 5.034 cents.
In a separate report on Jan 24, Natarajan has kept “buy” on ESR-REIT with the same target price of 54 cents.
The revised deal will bring about strategic merits and growth potential in the longer term, even if the revised deal will result in a lower DPU accretion for ESR-REIT and higher NAV dilution.
According to Natarajan, the revised merger will result in FY20 (pro forma) DPU accretion of 4.7% from the 5.8% based on its earlier deal terms. It will also result in an 8.5% NAV dilution from 6.4% previously.
“The NAV dilution is justified in our view considering the addition of high quality logistics portfolio, which remains one of the most in demand and favoured asset class on the back of structural shifts from Covid-19. Gearing (post completion) will remain unchanged at 42.1%, which, in our view, is manageable,” he writes.
As at 3.22pm, units in ALOG are trading 0.5 cent lower or 0.57% down at 87 cents, while units in ESR-REIT are trading flat at 44.5 cents.
Photo: ALOG
