EC World REIT - RHB Invest 2019-02-26: Master Leases Extended Until 2024; Keep BUY


EC World REIT - Master Leases Extended Until 2024; Keep BUY

  • Maintain BUY and raise our DDM-derived Target Price to SGD 0.84, from SGD 0.81, 11% upside with 8% yield.
  • EC World REIT's 4Q/FY18 results met expectations. With strong earnings visibility from extended master leases up to 4Q24, we lowered by 50pbs our COE to 9.5% and lowered FY19-21F DPU 1-2% to factor in a slightly higher interest cost.
  • With its strategically located seven assets, EC World REIT remains a good proxy to the booming e-commerce and logistics segment growth in China. As its properties mainly cater to domestic consumption, we see minimal impact from the US-China trade tensions.

Early renewal of master leases shows sponsors commitment.

  • EC WORLD REIT (SGX:BWCU) addressed one of the key market concerns, with an early extension for another four years of its three master lease properties. The leases which were due to expire in 4Q20, will now be extended until 4Q24.
  • Under the new lease term there will be an annual rent escalation of 1-2% pa (see Figure3 in the attached PDF report). As master lease rents accounts for 70% of FY18 NPI, this extension provides a good earnings visibility. The early extension also shows sponsors commitment (who currently own c.44% stake in EC World REIT) and confidence in growing the underlying income.
  • Based on our understanding, except for Stage-1 Bei Gang logistics, the underlying EBITDA for the remaining two properties is higher than the current master lease rent payments.

Room for acquisitions led growth in the near-term.

  • EC World REIT’s current gearing of 31.5%, is currently on the lower side compared to that of its peers and provides debt headroom of c.SGD200m for acquisitions (assuming 40% as a comfortable level).
  • We believe EC World REIT could potentially look at acquiring its sponsors’ Fu Zhou E-commerce property in the near-term. It also has access to the 13 YCH logistics assets across SE Asia which, if acquired, could transform it into a pan Asian e-commerce logistics play.

Expecting 3-7% positive rent reversion for 2019.

  • Post extension of master lease terms (which are subject to unit holders’ approval) EC World REIT’s WALE will be extended to 4.8 years (currently 2.0 years) with 72% of leases expiring after 2023. For FY19, c.6.5% of leases are due for renewal with majority coming from the newly acquired Wuhan Meiluote (WHML).
  • As the property is currently under–rented compared to market, we see scope for healthy positive rent reversions in mid-single digits.

Key risks.

  • Sharp spike in borrowing costs, FX fluctuations (SGD vs CNY currently 6-month rolling hedges) and adverse regulatory/policy changes.

Vijay Natarajan RHB Securities Research | 2019-02-26
SGX Stock Analyst Report BUY MAINTAIN BUY 0.84 UP 0.810