• Maintain BUY and unchanged ESR REIT Target Price of SGD0.60, 7% upside.
• ESR-REIT (SGX:J91U)’s 4Q19/FY19 results met our and Street estimates.
• With the industrial sector stabilising, we believe its well-diversified and Singapore-centric portfolio is well-equipped to tap into any demand uptick. Management emphasised its near-term strategy of asset recycling and extracting value via asset enhancements.
• One concern, however, is the sizeable SGD81m revaluation loss recorded in FY19.
• Valuations are reasonably attractive, at 1.3x P/BV with a 7.3% dividend yield.

Expecting a Slightly Better FY20

• Management noted that sentiment across industrial tenants have improved, with some sectors looking for expansion although the broader theme is still on consolidation. This is also reflected in recent Purchasing Managers’ Index (PMI) data, with Singapore’s PMI expanding marginally to 50.1 in Dec 2019, after seven consecutive months of contraction.
• Overall, management expects to see some improvement in portfolio occupancy, and guided for a flattish to slight positive rental outlook.

Hyflux Update

• Hyflux (SGX:600) currently occupies about 30% of the total space in 8 Tuas South Lane, for which it has been paying rental. Management has found tenants for another 26% of the space, bringing the current occupancy rate to 56%. ESR-REIT is seeing good demand from tenants for the remaining space and expects to ramp up the occupancy rate to 80% in the coming quarters. It has also fully utilised the rental guarantee provided by Hyflux to cover the rental shortfall.

Asset Enhancement Plans Awaiting Final Approval

• For 7000 Ang Mo Kio Avenue 5, it has signed an MoU with a prospective data centre tenant to redevelop the space (c.270,000 sqf), as mentioned in past reports. However, there has been some delay with the tenant getting approvals from the authorities.
• Management noted that it is likely to wait until 1H20 to get the approvals. If the green light is not granted, it has alternative plans to develop the space into a high-specification industrial building – for which it has already received a lot of enquiries. The site also has an additional 225,000 sqf of unutilised space for future developments. Besides this, it has also identified six other assets with > 0.5m sqf of unutilised plot ratio for redevelopment.

Plan to Grow and Leverage on Sponsor’s Strength

• In terms of strategy, management plans to divest 2-3 non-core assets (short land tenures with minimal asset enhancement potential), and recycle the capital on asset enhancements and acquisitions.
• The REIT also plans to expand its portfolio overseas, leveraging on sponsor ESR Group, which manages logistics assets with an AUM of > USD20bn across six countries. Its potential target markets include Australia, China and Japan. In Singapore, it will continue to look for quality acquisitions with the possibility of M&A-led growth in the medium term.

DPU Changes and Risks

• We trim our FY20-21F DPU by 1-2%.
• Tenant defaults and escalating global trade tensions remain as key risks.

Source: RHB Invest Research - 24 Jan 2020