ESR-REIT’s 1Q19 results were within expectations. Post-merger, 1Q19 gross revenue increased 93% to S$64.8m or 26.0% of our initial full-year forecast, with NPI increasing 104% to S$48.6m. With the larger enlarged unit base and a S$2.1m capital distribution, DPU increased 18.9% YoY to 1.007 S cents or 26.8% of our initial full-year forecast. We consider this within expectations, albeit on the higher end of our forecasts. Notably, rental reversions were +1.6% for the quarter, on contrast with -2.9% for FY18.
We remain a little wary on ESR-REIT’s relatively high gearing ratio of 41.9%, but we have previously baked in the risk of equity financing. As it stands, our FY19F DPU forecast is 3.85 S cents, below the Bloomberg consensus, partly as we have assumed some form of equity financing this year to fund ~S$40m of capital expenditure needed for asset enhancement initiatives.
We previously assumed a Hyflux Membrane default after 1Q19, a full drawdown in the security deposit and a gradual recovery in occupancy thereafter. Given the absence of updates in April thus far, we assume a default after 2Q19 instead. After adjustments and factoring in a lower risk-free rate of 2.3% (2.7% previously), our fair value increases 2.7% from S$0.55 to S$0.565. Looking ahead, we look forward to a bottoming in industrial rents in 2019, though towards the latter half of the year given the backend-loaded supply injection last year.
Since our downgrade from Buy to Hold (the only non-Buy on the street), ESR-REIT has underperformed the STI by 7%. As at 24 Apr’s close, the REIT is currently trading at 1.11x P/B (versus the 1.34x average of its large portfolio peers), and a dividend yield of 7.5% FY19F yield (vs. the 5.7% current yield of its large portfolio peers). Given the sharp unit price decline, we upgrade ESR-REIT from Hold to BUY with a fair value of S$0.565.
Source: OCBC Research - 25 Apr 2019
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Created by kimeng | Dec 29, 2022
Created by kimeng | Dec 29, 2022