Sized up for growth
? In our post-merger forecasts for ELOG, FY22F DPU is 3 Scts, with potential for growth accelerating from FY24F via capital recycling and asset enhancement.
? At 7.3% FY22F DPU yield, ELOG is attractively valued vs. industrial SREITs’ average of c.6%. Asset recycling, M&A and trading liquidity are key catalysts.
? Benefits of transformative merger are still underappreciated, in our view. We reiterate our Add rating with a higher DDM-based TP of S$0.51.
Expanding size and scale
At FY22F DPU yield of 7.3%, ELOG ranks as one of the most attractively valued industrial SREITs in our coverage. We believe that the market has not recognised the benefits of the transformative merger that includes a 60% expansion in market cap to S$2.7bn as at Jul 2022, with higher trading liquidity and greater index representation as well as the futureproofing of its portfolio via greater geographic and sub-sector diversity. Post the merger with ALOG, a sizeable 52.3% of ELOG’s expanded portfolio income is derived from the more resilient logistics/warehouse sector in Singapore and Australia while extension of the average underlying land tenor of its portfolio has increased NAV robustness. That said, Singapore remains a significant 71% of AUM, thus limiting forex volatility.
Increasing portfolio robustness and strengthening credit metrics
Other benefits of the merger include a strengthening of credit metrics post refinancing, with 64bp savings in average all-in funding costs to 2.7% vs. 3.34% in 1Q22. We believe ELOG’s larger portfolio and strong sponsor backing will provide the REIT the added advantage of diversified funding sources. ELOG is also reviewing options to obtain a credit rating to further lower funding costs from the debt and capital markets, which will stand it in good stead in the current rising interest rate environment. We preemptively bake in an additional 15-25bp increase in overall funding costs into our FY22-24F estimates. A further 25bp jump in funding cost could erode ELOG’s DPU by 0.05 Scts or 1.6%.
Potential upside from inorganic growth drivers
With its sponsor ESR Group’s asset base of US$59bn and executable pipeline of US$2bn of assets in Asia Pacific, we believe ELOG has ample opportunities for acquisition growth. Based on a post-merger gearing of 40.8%, it has potential debt headroom of S$941.9m. ELOG has also earmarked S$450m worth of assets to be recycled over the next 12 months and proceeds can be redeployed into new opportunities. If divestments happen earlier, this could lower gearing to c.35%, a comfortable level to tap acquisition opportunities. In order to boost returns from its current portfolio, ELOG has identified c.S$110m worth of asset enhancements to be completed over the next 2-3 years. Based on projected returns of 6- 7%, these initiatives could lift NAV by c.1%, further easing gearing.
Reiterate Add with a higher DDM-based TP of S$0.51
Our TP (COE: 7.77%, LTG: 1.88%) implies a 5.9% FY22F DPU yield, which is midway between its average and +0.5 s.d. historical yield range. Downside risks: slower-than-anticipated acquisitions and higher- than-projected interest rate hikes (see page 20 for details).