Brokers' take

Compiled by Leila Lai

ESR REIT

| BUY (UPGRADED)

APR 25 CLOSE: $0.52

FAIR VALUE: $0.565

OCBC Investment Research, April 25

ESR Reit's Q1 2019 results were within expectations. Post-merger, Q1 2019 gross revenue increased 93 per cent to $64.8 million or 26 per cent of our initial full-year forecast, with net property income (NPI) increasing 104 per cent to $48.6 million.

With the larger enlarged unit base and a $2.1 million capital distribution, distribution per unit (DPU) increased 18.9 per cent year on year to 1.007 cents or 26.8 per cent of our initial full-year forecast. We consider this within expectations, albeit on the higher end of our forecasts.

We remain a little wary on ESR Reit's relatively high gearing ratio of 41.9 per cent, but we have previously baked in the risk of equity financing.

We previously assumed a Hyflux Membrane default after Q1 2019, a full drawdown in the security deposit and a gradual recovery in occupancy thereafter. Given the absence of updates in April thus far, we assume a default after Q2 2019 instead.

After adjustments and factoring in a lower risk-free rate of 2.3 per cent, our fair value increases 2.7 per cent from $0.55 to $0.565. Looking ahead, we look forward to a bottoming in industrial rents in 2019, though towards the latter half of the year given the backend-loaded supply injection last year.

Since our downgrade from "buy" to "hold", ESR Reit has underperformed the STI by 7 per cent. Given the sharp unit price decline, we upgrade ESR Reit from "hold" to "buy" with a fair value of $0.565.

ST ENGINEERING

| BUY (MAINTAINED)

APR 25 CLOSE: $3.89

TARGET PRICE: $4.70

UOB Kay Hian Research, April 25

The surprise contract win from the US Navy should lead to further upward re-rating for ST Engineering (STE).

The orderbook win is substantially better than expected, as year-to-date STE has already secured 65 per cent of 2018's $4.8 billion in contract wins.

Taking into account the latest win by VT Halter Marine, year-to-date order win by the marine division amounts to $1.014 billion, which is higher than the $991 million of contracts won for the whole of 2018.

STE also secured other contracts that were not disclosed because of customer confidentiality.

During Q4 2018's results announcement, STE had guided that $4.9 billion in orderbook was expected to be delivered for 2019.

Aside from recent mergers and acquisitions, STE's guidance on orderbook recognition would already provide revenue and net profit growth for 2019.

There is also the possibility that the current order wins could boost 2019's revenue by a greater quantum than STE's initial guidance.

If so, earnings could rise by a greater quantum than street's estimates.

Maintain "buy" with a higher target price of $4.70.

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