New-economy play with low ESG risk
ELOG scores 53 under our expanded ESG 2.0 methodology, which is above the average of 50. ELOG has a progressive sustainability framework. We believe improvements in information disclosure and more ambitious longterm targets could help ELOG obtain a higher score. Maintain BUY and TP of SGD0.55 (COE: 6.5%, LTG: 2%).
Making steady progress in ESG
ELOG is making steady progress as its Scope 2 GHG emissions, energy and water consumption fell in FY21. We note lower solar power generation in FY21 due to hardware malfunctioning, and expect maintenance to be completed in FY22. Female board representation is low at 10% compared to MLT’s 33% (MLT SP, SGD1.55, BUY), while independent director ratio dropped to 40% in FY21 from 50% in FY20. Improvement in board gender diversity and independence could enhance its “S” and “G” scores.
Ahead of ESG targets
ELOG reduced energy intensity of multi-tenanted buildings (MTBs) by 14% in FY21, against annual reduction target of 1%. We believe more aggressive ESG targets pertaining to energy and water saving could improve the scores. Notably, ELOG is the only industrial S-REIT setting water certification targets. It targets to certify all MTBs under the PUB Water Efficiency Building (WEB) programme by FY23, and has achieved 94% in end-2021. Under the PUB WEB programme, premises are projected to lower water consumption by c.5% with the help of water efficient fittings and controlled flow rates/flush volumes.
Maintain BUY and TP of SGD0.55
ELOG’s all-in cost of debt fell to 2.97% post-merger with ARA LOGOS, and management targets a solid credit rating in 2H22 to further reduce the cost. We see SGD958.5m debt headroom and SGD35.3m divestment gain from 2 JKB supporting ELOG’s acquisition of Sakura Distribution Center in Japan (for SGD183.5m). A 50bps increase in cost of borrowing will negatively impact DPU by 0.7%.