Re-rating Thesis for ESR-REIT Playing Out; Maintain BUY

• Our initiation thesis ESR-REIT - Maybank Kim Eng 2021-08-16: Ripe For Re-rating ~ Best Lock In The 6% Yield was based on a confluence of three key factors that would drive a re-rating, the first of which has been realised. ESR-REIT (SGX:J91U) was included within the FTSE EPRA Nareit Global Developed Index effective 6th Sept '21.
• The market’s strong reaction post-announcement (on 1st Sept ’21) reaffirms our view that ESR-REIT is ripe for a re-rating, with its units breaking the key S$0.480 resistance level the day after.
• Focus is now on ESR-REIT's 2H21/2022 earnings, where we will be looking out for confirmation of strong industrial tailwinds translating into fundamental growth (via rental reversions and occupancies). We maintain our estimates and reiterate BUY with street-high DDM-based target price of S$0.55 for ESR-REIT.

FTSE Nareit Inclusion a Step in the Right Direction

• Our key take-away from the event is ESR-REIT’s ripeness for a re-rating. ESR-REIT’s units appreciated the most intra-day post announcement (+11% from previous close to intra-day high) vs its peers ARA LOGOS Logistics Trust (SGX:K2LU) (+6 5.9%; 1.36x) and AIMS APAC REIT (6.6%; 1.02x).

But Not Sufficient to Drive a Convincing Re-rating

• ESR-REIT's share price have retraced since the post-announcement run-up. We believe a full re-rating to MKE’s valuation of 1.24x FY22E P/B and exit yield of 5.7% (based on target price of S$0.55) will only be realised upon confirmation of our thesis, which will become more apparent after 2H21 earnings.

Look to 2H21 Earnings as the Next Catalyst

• Fundamentally, we are looking for contrasts with the street, which is ~5.3% above MKE’s FY21 estimate and pencilling in a higher FY21E DPU of S$0.031.

Source: Maybank Kim Eng Research - 9 Sep 2021