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RHB Investment Research Reports

Author: rhbinvest   |   Latest post: Mon, 8 Aug 2022, 11:19 AM

 

ESR-REIT - Unitholders Approve Merger; Stay BUY

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  • Maintain BUY and TP of SGD0.53, 26% upside with c.7% yield. ESR- REIT’s proposed merger with ARA LOGOS Logistics Trust (ALLT SP, TAKE PROFIT, TP: SGD0.95) has received the green light from unitholders from both sides – paving the way for merger completion by end-1H22. We expect the combined REIT to execute its strategy of portfolio optimisation and asset enhancements, which should lead to a rerating. With a strong and supportive sponsor and a healthy pipeline of assets, we see good growth potential. Valuations are attractive, at 1.1x P/BV.
  • Overwhelming approval to revised offer. More than 98% of ESR-REIT’s unitholders by value voted in favour of resolutions for the merger and issue of shares, as part of the merger with ALLT (see our 24 Jan note for further merger details). For ALLT, the scheme consideration was approved by 94.8% of unitholders by value and 62.9% (representing 92.5% in value) by the unitholders present voting by proxy at the scheme meeting. This is well above the threshold requirement of >50%. Following this, the court hearing of the application to sanction the scheme is expected to be held on 11 Apr and, if successful, unitholders are expected to receive units and cash consideration by end-April – with the delisting of ALLT expected on 5 May. Post-merger sponsor ESR Cayman will remain as a key shareholder (11.2% of combined entity) and the REIT manager.
  • Recap of merger merits. The merger will result in a combined ESR- LOGOS REIT asset size of SGD5.4bn (from ESR REIT’s SGD3.4bn). This will make it one of the top 10-SREITs by free float market cap. New economy assets (high-technology and logistics warehouses) will account for 66% of portfolio rental income, vs 47% presently. We like the merger for three key reasons: i) A sizeable new-economy and well diversified portfolio reduces concentration risks and, more importantly, resolves the conflict of interest from overlapping acquisition mandates with the sponsor, ii) it lowers the cost of capital, with the interest cost alone expected to fall by c.100bps post-merger, and iii) there are opportunities to transform its portfolio, by accelerating the divestment of its older, shorter-tenure assets and reinvesting the proceeds into modern new economy assets in the Asia- Pacific, with a visible c.USD2bn worth of sponsor pipeline assets.
  • Our forecasts currently do not include merger effects which should contribute positively to DPU. Based on our proprietary methodology we derive an ESG score to 3.1 (out of 4) for the REIT. As this score is one notch above the country median, we have applied a 2% ESG premium to our DDM-derived intrinsic value to derive our TP.

Source: RHB Research - 22 Mar 2022

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