Brokers' take

ESR REIT I BUY (INITIATE)

FEB 12 CLOSE: $0.515

TARGET PRICE: $0.61

RHB Research, Feb 12

ESR-Reit (real estate investment trust) has been on a transformational path from the time ESR Group (ESR) became its sponsor (January 2017), with a more than two-fold increase in asset value - it is currently the fourth-largest listed industrial Reit.

We believe the market is yet to recognise the full potential of the economies of scale from its growth and sponsor strength as it trades at an attractive FY19F yield of 8 per cent.

This is 170 basis points higher than that of its industrial peers and the S-Reits average.

Despite some threats from recent trade tensions, we expect overall industrial sector rents to improve 1 per cent to 3 per cent and occupancy to slightly improve on the back of tapering industrial supply.

This should have a positive impact on ESR-Reit, which has its assets strategically located across key industrial zones.

After a rapid expansion via inorganic growth over the last two years, management states it will focus more on organic growth in the next two years.

For this, it identified seven properties for asset enhancement initiatives over the next three years.

Our target price is based on a five-year dividend discount model.

ESR-Reit trades at 1.1 times price/book value, a 10 per cent discount to the industrial Reit average of 1.23 times. Liquid at US$1.1 million/day.

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MANULIFE US REIT I BUY (MAINTAINED)

FEB 12 CLOSE: US$0.86

TARGET PRICE: US$0.92

DBS Equity Research, Feb 12

We maintain our "buy" call on Manulife US Real Estate Investment Trust (Must) with a revised target price of US$0.92.

As anticipated, Must's share price rallied over the last two months as we believed the stock was oversold due to concerns over a potential negative ruling on Must's tax structure and correction of its listed peer.

We believe Must still has a potential to trade at about 1.1 times price/book.

Compared to consensus, our distribution per unit (DPU) estimates are 2 per cent to 3 per cent lower, as we have assumed that Must will refinance its 2.46 per cent initial public offering debt over the next few years at 4.5 per cent to 4.75 per cent.

However, despite our conservative projections, we believe Must still offers compelling value, given the expected strong rebound in DPU and attractive forward yield of 6.9 per cent, which is about 100 basis points higher than the S-Reit yield.

Following Must's recent share price rally, we believe it is now easier to find accretive acquisitions.

Thus, mergers and acquisitions remains a key re-rating catalyst going forward.

Additional upside would also come from Must refinancing its debt at lower interest rates than our assumptions.

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