EC World REIT - RHB Invest 2019-05-14: Accretive Acquisition Of Fuzhou E-Commerce; Keep BUY

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EC WORLD REIT (SGX:BWCU)

EC World REIT - Accretive Acquisition Of Fuzhou E-Commerce; Keep BUY

• Maintain BUY with new Target Price of SGD0.85 from SGD0.84, 8% upside plus 8% yield.
• EC WORLD REIT (SGX:BWCU)'s 1Q results met expectations. The proposed accretive acquisition of Fuzhou E-Commerce logistic asset should further enhance EC World REIT’s positioning to the favourable Chinese e-commerce sector. This, combined with the recent master lease extensions (for four years), provides strong income visibility.
• Valuations are still attractive with the stock trading at 0.9x P/BV (sector: 1.1x P/BV).

Minimal impact from trade tensions as assets cater mainly for domestic consumption.

• About 80% of tenants operate in the delivery, logistics & distribution, and e-commerce service spaces, which have been seeing strong growth.
• With assets catering largely to the domestic market, we see minimal impact from rising US-China trade tensions, and on the other hand, could potentially benefit from the Government’s push to boost domestic growth.

Proposed acquisition of FEC.

• Fuzhou E-commerce (FEC) is located adjacent to its existing Fu Heng warehouse in Hangzhou, and comprises of a warehouse (80% of total GFA) as well as office and support buildings (20%). The vendors are the sponsor and its related entities, with the property having a remaining 40 years land tenure.
• The acquisition price of CNY1,113m (SGD 223.6m) is at a 6.3% and 7.5% discount to its average independent valuation without and with master lease agreements. The transaction is subject to unitholders approval and expected to be completed latest by 3Q19.

Long master leases with organic rent growth.

• The asset will be master-leased to sponsor for a tenure of five years (with option to extend for another five years), and comes with an initial NPI yield of 6.4%. There is also a built in rent-escalation of 2.25% pa.
• Management noted that while standalone underlying rents are below that of master lease implied rents, the master lessee remains profitable as it charges a service fee for the underlying tenants, which makes up a substantial portion of the revenue.
• The acquisition is accretive to both pro-forma DPU (+1.6%) and NAV (+1.4%). We like the transaction as it increases its portfolio exposure to favourable e-commerce sector, lengthens portfolio WALE and provides organic rental growth.

Gearing to move closer to 39%.

• The acquisition is expected to be funded by a combination of debt and cash. Post transaction gearing is expected to be around c.39% (from 31%), leaving little debt headroom for future acquisitions.
• Management also noted that debt cost is expected to be around 4.6%, excluding the upfront 3% funding costs.

Earnings adjustments.

• We have revised our FY19F-21F DPU up by 1-2% factoring in above acquisitions.
• Key risks are FX fluctuations, and adverse regulatory/policy changes impacting its assets and trust structure.
• EC World REIT is one of the RHB's Top Singapore Small Cap Companies - 20 Jewels 2019 Edition.

Results And Operations Review

1Q19 DPU up 2%YoY, results in line.

• EC World REIT's 1Q19 revenue and NPI for the quarter were lower 0.3% and 1.4%YoY in SGD terms, but were up 3% and 1.4% in CNY terms.
• Finance costs rose 2.6% y-o-y, mainly due to higher SBLC loan quantum. The results were in line with 1Q19 DPU accounting for 24% of our estimates.

Advanced negotiations for debt refinancing.

• EC World REIT's entire debt of c.SGD475m comprising onshore and offshore loans are due to mature in Jul 2019. The manager is currently in advanced discussions with the bank, and expects the refinancing exercise to be completed soon.
• We have currently factored in a 25-bp increase in interest cost compared to the current all-in interest rate of 5.2% pa (includes amortised upfront fee).

Long WALE post new master lease agreements.

• EC World REIT’s new master lease agreements were overwhelmingly approved by unit holders, which should lengthen the WALE to 4.7 years from 1.8 years and provides income stability.
• Only about 4% lease by rental income is due for renewal this year. We expect mid-single digit positive rent reversions.

High occupancy maintained.

• Committed occupancy improved to 99.97% in 1Q19 (4Q18 (99.2%) with occupancy improvements coming, mainly from Wuhan MeiLuo Te.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-05-14

SGX Stock Analyst Report BUY MAINTAIN BUY 0.85 UP 0.840