RHB initiates 'buy' on Cromwell European REIT with TP of EUR2.15

Felicia Tan
3-min read

To RHB, the REIT offers an “attractive entry level” for a mid- to long-term play on the recovery of Western Europe.

RHB Group Research analyst Vijay Natarajan is initiating “buy” on Cromwell European REIT (CEREIT) with a target price of EUR2.15 ($3.09).

To Natarajan, the REIT offers an “attractive entry level” for a mid- to long-term play on the recovery of Western Europe. At its current share price levels trading at 0.6x P/BV below -2 standard deviation (s.d.) levels, the REIT’s near-term weakness has been “sufficiently priced in", Natarajan writes.

The REIT also has an attractive dividend yield of around 10%, after accounting for rising interest costs, he adds.

“The REIT’s consistent historical operating performance and portfolio rebalancing track record lends confidence that it will emerge stronger from current market challenges in [the] Euro area,” the analyst continues.

CEREIT has a portfolio of 115 assets currently valued at EUR2.6 billion across 10 different countries. Its top three markets, the Netherlands, Italy and France, account for two-thirds, or 66% of the REIT’s portfolio by value. Office assets account for 49% of its portfolio, although the proportion has been decreasing since 2019 with the REIT’s ongoing pivot to the industrial/logistics assets. CEREIT’s industrial/logistics assets currently stand at around 46%.

To Natarajan, the REIT is expected to lower its proportion of office assets with more divestments “in the offing”, as well as with capital likely to be recycled to logistics assets.

Since the REIT’s listing in November 2017, it has reported a strong operational track record with its occupancy on a steady uptrend. As at Natarajan’s report on Dec 21, CEREIT has an occupancy level of a record 95.7%.

“Its ability to maintain high occupancy level of [around] 95% over last two years despite the Covid-19 impact demonstrates on-the-ground property management team’s expertise, in our view,” the analyst says. “Rent reversions too have been positive since 2HFY2018 with portfolio’s blended reversionary yields [around] 80 basis points higher than [its] current net property income (NPI) yield - indicating upside potential.”

Another plus for the REIT is its leases, where about 90% of them are pegged to inflation-linked rent escalation clauses, providing rental growth from the high inflation environment.

On the other hand, utility charges are mostly passed through to tenants as per contractual agreements.

“The REIT has also been active on the divestment front since the start of the year with more planned in the near term, which we believe could potentially unlock value for unitholders,” says Natarajan.

Amid the high-interest-rate environment, the REIT also has about 76% of its debt hedged for the next two years with minimal refinancing needs till November 2024. As at the analyst’s report, CEREIT’s gearing is at a “manageable” 38.9%.

In environmental, social and governance (ESG) terms, CEREIT scored 3.2 out of 4.0 based on RHB’s proprietary model. “As this score is two notches above the country median, we apply a 4% premium to our intrinsic dividend discount model (DDM)-derived fair value.”

Catalysts to CEREIT’s unit price includes the peaking of the inflationary environment as well as interest rates. A potential truce to the Russia-Ukraine war and asset divestments at a premium to their book value are also seen as catalysts.

On the other hand, risks include inflation remaining stickily high resulting in higher interest rates for longer resulting in severe recession, and a prolonged Russia-Ukraine war.

As at 3.35pm, units in CEREIT are trading 1 Euro cent lower or 0.65% down at EUR1.52.

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