Broker's take: Citi initiates coverage on 'hidden industrial gem' ESR Reit with 'buy'

CITI Research has initiated coverage on ESR Reit with a "buy" and a target price of S$0.57, saying the fourth-largest Singapore real estate investment trust (S-Reit) by assets under management (AUM) is a "hidden industrial gem".

The research house noted that ESR Reit has sizeable exposure to the "high value-add industrial space". Such properties make up 46 per cent of its AUM and account for 44 per cent of net property income.

"ESR Reit has ownership of two unique mixed-use business parks (BPs), UE BizHub East and Viva Business Park, which will not only benefit from the ongoing BP rental recovery amid benign supply growth, but also from the resilience and rental upside of their sizeable embedded hotel component and retail space, respectively," Citi analysts said.

Moreover, ESR Reit, which has a portfolio entirely located in Singapore, has the highest estimated FY2019 and FY2020 yield of 7.7 per cent and 7.8 per cent respectively among industrial S-Reits under Citi's coverage.

Looking forward, Citi said that there are four possible growth drivers for the Reit.

This includes organic rental growth and positive reversions from under-rented segments. Moreover, the Reit may stand to benefit from asset rejuvenation for general industrial buildings in its portfolio, and third party and acquisitions led by its sponsor ESR Cayman.

The last of the possible growth drivers highlighted by Citi is the acquisition of another Reit through a share swap, which could be conducted in a similar manner to ESR Reit's acquisition of Viva Industrial Trust in October 2018.

"Successful execution of key earnings drivers may expedite inclusion into FTSE EPRA/Nareit Index," Citi added.

Key risks to Citi's call include macroeconomic weakness having an impact on industrial space demand and rent reversions.

As at 2.32pm, ESR Reit units were unchanged at S$0.51.