EC World REIT - DBS Research 2019-02-26: Master Lease Extension Enhances Visibility


EC World REIT - Master Lease Extension Enhances Visibility

  • EC World REIT's 4Q18 DPU up 4.4% y-o-y to 1. 57 Scts.
  • Master lease extension may soon materialise, and spur a re-rating as overhang EC World REIT’s medium-term growth outlook is removed.
  • Low gearing signals acquisition capacity which will provide further upside if it happens.
  • Maintain BUY; Target Price of S$0.86.

What’s New

4Q18 results within expectations.

  • EC WORLD REIT (SGX:BWCU) reported a stable set of 4Q18 results.
  • Revenue and net property income increased by 13.5% and 16.1% y-o-y to S$23.5m and S$20.8m respectively. The increase was mainly driven by the contribution from Wuhan Meiluote, which was acquired in April-18, aided by the in-built rental escalations and accounting adjustments for effective rent and deposits. Excluding this impact, topline and net property income would have risen by 1.8% and 2.6% respectively.
  • Finance cost was 5.5% higher y-o-y mainly due to additional loans undertaken to fund the purchase of Wuhan Meiluote.
  • Distributable income rose by 5.4% y-o-y to S$12.4m. DPU rose by a smaller 4.4% y-o-y (flat q-o-q) to 1.57 Scts given the enlarged base.
  • On a full year basis, EC World REIT's distributable income came in at S$48.8m, up 3.6% y-o-y and in line with our projection of S$48.1m on the back of 5.3% and 5.6% rise in revenues and net property income to S$96.3m and S$87.3m respectively. The better performance was mainly acquisition-led.

Near term refinancing needs to be addressed.

  • Gearing remains stable at 31.5% which we believe is a conducive level for acquisitions. Debt cost remains stable at 4.3% (all-in interest rate of 5.2%).
  • We understand that the Manager is in active discussions to address EC World REIT’s upcoming refinancing obligations in FY19F.

Proposed renewal of master lease a positive surprise.

  • Separately, EC World REIT announced the proposed entry into new master lease agreements with wholly-owned subsidiaries of the Sponsor for the following properties:
    1. Stage 1 properties of Beigang Logistics,
    2. Chongxian Port Investment, and
    3. Fu Heng Warehouse.
  • As this is deemed to be an interested party transaction, an extraordinary general meeting (EGM) will be called for unitholders to vote on this.
  • We estimate that the 3 master leases contribute close to 69% of our estimated FY19F-20F topline. With the existing master leases expiring in 4Q20, the significant improvement in income certainty over the medium term secured through the master lease extension will be a positive catalyst for EC World REIT, in our opinion.
  • In addition, built-in escalations in the new proposed master lease ranging between 1-2% p.a. will provide EC World REIT with a stable organic growth profile in the medium term.
  • Assuming unitholders approve the extension of the proposed master lease, EC World REIT’s weighted average lease expiry (WALE) will be extended from 2.0 years to 4.8 years.

Carmen TAY DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-02-26
SGX Stock Analyst Report BUY MAINTAIN BUY 0.860 SAME 0.860