Portfolio rejuvenation
? ELOG plans to divest 7 non-core assets in Singapore and Australia for S$337m.
? The sale will likely rejuvenate its portfolio and strengthen its balance sheet and enable it to seize new acquisition opportunities.
? Maintain Add rating with an unchanged TP of S$0.39.
Proposed divestment of 7 non-core assets
ELOG recently announced the proposed divestment of a portfolio of 5 assets in Singapore as well as the individual sale of 22 Chin Bee Drive and 51 Musgrave Rd, Australia. In aggregate, these divestments total S$337m. The portfolio of 5 properties was sold for S$313.5m or at an average 5.1% discount to valuation while the latter 2 assets were transacted at 2.4-6.2% above valuation. The divestments are in line with management’s articulated strategy to rejuvenate its portfolio, recapitalise its balance sheet and recycle capital at a time when cap rates expand. According to management, the exercise is expected to be completed in 3Q-4Q23.
Portfolio metrics to strengthen following sale
In terms of impact, management indicated that, post the proposed divestments, ELOG’s weighted average land lease expiry will improve from 37.1 years to 37.9 years as the divested properties have a remaining weighted average land lease of 27.2 years. Meanwhile, its weighted average lease expiry will improve to 3.3 years (from 3.2 years). ELOG’s post-divestment portfolio is also further de-risked as its exposure to single tenanted properties will decline to 21.7% (from 23.3%) and contribution from its top 15 tenants is lowered marginally to 34.8%.
Lower gearing, improved debt headroom for growth opportunities
Management said that its post divestment proforma gearing could trend down to 33.6% from 41.8% as at Dec 2022, assuming proceeds from this and the earlier divestment of 49 Pandan Road as well as proceeds from its earlier equity fund raising are used to pare down debt in the near term. We believe this will provide ELOG with significant debt headroom to expand inorganically or undertake asset enhancements/redevelopment opportunities. In terms of inorganic growth opportunities, we believe ELOG could use the proceeds to acquire assets from its sponsor’s ESR/LOGOS pipeline in Singapore. Meanwhile, ELOG has said that it plans to redevelop three of its industrial assets and is planning to convert a logistics asset into a cold store logistics facility.
Reiterate Add rating
We tweak our estimates marginally to factor in income vacuum from the divested assets offset by interest savings assuming the proceeds are utilised to pare down debt and capital top-ups from divestment gains. Our DDM-based TP stays unchanged at S$0.39. ELOG’s share price has lagged behind its peers YTD due to its pre-emptive equity fund raising and income vacuum pending redeployment of capital. Potential catalysts are redeployment of capital into accretive acquisitions. Downside risks are slower-than-anticipated acquisitions and higher-than-projected interest rate hikes.
