Felicia Tan Tue, Jun 14, 2022
DBS Group Research analysts Dale Lai and Derek Tan are keeping maintaining their “buy” call on Cromwell European REIT (CEREIT) after their site visit to some of the REIT’s properties in Italy, France and the Netherlands.
“The tour gave us the opportunity to meet with independent market consultants, as well as the local teams managing the portfolios in these three markets that account for 67% of CEREIT’s portfolio,” the analysts explain in their June 13 report.
From their visit, the analysts were “pleasantly surprised” by the bustling cities and influx of tourists as the Covid-19 outbreak in Europe looks to be “a thing of the past”.
They note that within the REIT’s portfolio, the light industrial and logistics segments outperformed in the last two years amid the Covid-19 pandemic.
“E-commerce, digital transformation, and the shifting habits of manufacturers led to the explosion in demand for high-quality light industrial and logistics properties, especially for assets that are strategically located,” they write.
In addition, they believe that the REIT’s properties in these three countries have “relatively better fundamentals” and they “will result in more resilience going forward”. They add that the consumer price index (CPI)-pegged rental escalations in place for its leases will drive steady, organic growth.
That said, while the REIT has weathered the Covid-19 pandemic well, the analysts see new risks emerging as Europe is expected to face a period of low-growth and high inflation amid the ongoing geopolitical crisis.
Logistics pivot could drive yield compression
On the back of a slowing economy and weakening Euro, CEREIT’s share price has fallen some 20% year-to-date (y-t-d). According to Lai and Tan, the decline appears to have priced in most of these risks.
“Yields have expanded to [over] +1 standard deviation above normal to 8.1% currently, which we believe to be attractive,” they write.
“As the REIT pivots to focus more on the logistics sector, this is expected to drive earnings resilience. Thus, we expect a compression in yields, given its improved earnings visibility and growth profile,” they add.
Management’s ESG focus
In their report, the analysts say they remain excited on the REIT’s management’s focus on “greening” its portfolio, which targets net zero operational carbon emissions by 2040.
“We see this as a multifold strategy, with operational efficiencies to drive cash flows and capital values. This has also enabled them to capture tenant demand, given an increased focus on properties with ‘green’ attributes,” they write.
Lower target price due to revised risk-free rate assumptions
Further to their report, the analysts have lowered their target price to EUR2.60 ($3.78) from EUR2.80 previously as they revise their risk-free rate assumptions.
The new target price is based on a discounted cash flow (DCF) valuation with a weighted average cost of capital (WACC) of 5.7% (and a risk-free rate of 3.0%). It also implies a target yield of 6.1% with a P/NAV multiple of 1.1x.
As at 3.01pm, units in CEREIT are trading 2 cents higher or 1% up at EUR2.02.