EC World REIT - RHB Invest 2019-08-08: Another Stable Quarter Barring FX Impact; BUY


EC World REIT - Another Stable Quarter Barring FX Impact; BUY

  • Keep BUY with new SGD 0.82 Target Price from SGD 0.85, 12% upside plus 9% yield.
  • EC WORLD REIT (SGX:BWCU)'s 2Q results met: Earnings outlook remained stable with minimal uncertainty post master lease extensions, and loan refinancing. Its latest acquisition, Fuzhou E-Commerce’s (FEC) logistic asset should contribute positively from 3Q19.
  • The potential impact from the rising US-China trade tensions on EC World REIT’s assets are minimal, as they cater largely to the domestic market. However, a prolonged CNY weakness should have a negative impact on DPU.

Target Price revised.

  • We revise our COE higher by 30bps to 10% in light of the increasing macroeconomic risks and currency fluctuations, resulting in a lower Target Price. Valuation remains attractive at 0.8x P/BV and FY19F yield of 8.6%.

Loan tenure extended by c.3 years at similar interest cost.

  • EC World REIT completed the refinancing of all its loans (end-July) from a mixture of offshore and onshore facilities. The majority of loans are on 3-year tenure (except the CNY77m loan, which has a 10-year tenure).
  • While interest cost for its onshore/offshore facilities have gone up slightly, management noted that overall all-in running interest rate is expected to be similar to the current 4.5%. This is due to the tweaking of its debt mix to 60% offshore and 40% onshore from 50% and 50% previously.

Mild positive rent reversions expected from 2020 lease renewals.

  • About 3%/14% of leases by gross rental income are due for renewal in 2H19-2020. The bulk of 2020 lease renewal is from lease expiry of a major state owned enterprise tenant – China Tobacco – which occupies c.95% of Hengde Logistics.
  • Management expressed confidence in terms of renewing the lease upon expiry due to the customised nature of the warehouse asset, but guided that rental uplift is likely to be modest, at best.
  • Overall, we expect rental reversion to remain positive at 3-5% for leases expiring this year and the next.

FEC contributions to kick in from 3Q.

  • The acquisition of FEC is expected to be completed in the next two weeks, after which the asset will be master leased to sponsor for a tenure of five years (with option to extend for another five years). The asset – acquired at an initial NPI yield of 6.4% – is accretive to both pro-forma (FY18) DPU and NAV, and also has a built-in rent escalation of 2.25% pa.
  • Gearing post transaction should increase to c.39%, and is close to management’s comfortable level of 40%. Consequently, future acquisitions are likely to be funded by a combination of equity and debt.
  • Current hedging policy is to hedge 75% of its distributable income on a rolling 6-month basis using put spread option. Management is currently revisiting its hedging strategy in light of the CNY’s fluctuations.

Vijay Natarajan RHB Securities Research | 2019-08-08
SGX Stock Analyst Report BUY MAINTAIN BUY 0.82 DOWN 0.850