EC WORLD REIT (SGX:BWCU)
EC World REIT - Netting Another E-commerce Asset
- EC World REIT completed acquisition of Fuzhou E-Commerce property; c.1.6% accretion to DPU.
- Fuzhou E-Commerce property on 5-year master leasewith 2.25% annual escalations.
- Manager remains on the lookout for more acquisitions.
- DPU of 1.489 Scts; 73% of our FY19 estimates.
Maintain BUY and Target Price of S$0.86.
- We maintain our BUY call and Target Price of S$0.86. We like EC World REIT (SGX:BWCU) for its portfolio of e-commerce logistics properties that are mostly on master leases with annual rental escalations. The recent acquisition of yet another property on master lease will provide further income stability and visibility. However, persistent weakness in the RMB has been limiting EC World REIT from achieving its full potential.
Where we differ:
- On the back of the Fuzhou E-Commerce acquisition that was fully funded by borrowings and cash, we see this as a positive for EC World REIT despite the increase in gearing to 39.6%. We believe that EC World REIT does not need any equity fund-raising to pare down gearing, and it will only be done in conjunction with an accretive acquisition.
E-commerce powering growth
Acquisition of the Fuzhou E-Commerce property was completed in August 2019
- Acquisition of the Fuzhou E-Commerce property was completed in August 2019, and a partial contribution was recognised in 3Q19. The initial yield of 6.4% will boost NPI by c.S$14.4m annually, with a 2.25% annual escalation for the next five years. The property consists of a 171,795-sqm warehouse and two office buildings totaling 42,489 sqm. The master lease provides the tenant with the option to extend the lease for a further five years upon the expiry of the first. See EC World Reit Announcements; EC World Reit Latest News.
- The S$223.6m acquisition was funded by additional borrowings and cash.
- The Fuzhou E-Commerce property is adjacent to EC World REIT’s existing property, Fu Heng Warehouse. The acquisition will create a logistics hub with a combined 308,571 sqm that focuses on e-commerce-related fulfilment activities, and further enhances operational efficiency.
- The acquisition will create an additional c.1.6% to DPU, and c.1.4% accretion to NAV.
Gross revenue of S$73.3m was 0.7% higher compared to 9M18
- Gross revenue of S$73.3m was 0.7% higher compared to 9M18, due mainly to in-built rental escalations and contribution from Fuzhou E-Commerce property that was partially offset by a weaker RMB. NPI of S$65.2m was 1.9% lower compared to 9M18, mainly due to a weaker RMB. In RMB terms, the gross revenue and NPI were 4.3% and 1.7% higher respectively.
Finance cost of S$23.2m was 13.4% higher compared to 9M18.
- This was mainly due to higher borrowings undertaken for the acquisition.
- Overall borrowing costs inched up by 0.1% q-o-q to 4.6% and gearing currently stands at 39.6%. This is still within management’s long-term gearing limit of 40%, and we believe that the company would not need any equity fund-raising unless it makes an acquisition.
- Approximately 65% of borrowings are offshore RMB loans due to significantly lower borrowing costs (c.1.3% lower). The bulk of these offshore facilities have been swapped into fixed rates.
DPU was S$36.1m, representing a 0.7% decrease compared to 9M18
- DPU was S$36.1m, representing a 0.7% decrease compared to 9M18 mainly due to technical timing difference between the loan drawdown and completion of acquisition of Fuzhou E-Commerce and FX differences. However, DPU should improve in 4Q19 with the full quarter’s contribution from Fuzhou E-Commerce property, and further hedging of distributable income. See EC World Reit Dividend History.
At least 75% of income has been hedged
- At least 75% of income has been hedged on a rolling 6-month basis with the use of a FX put strategy that lowers hedging costs. Management is currently looking into hedging its interest payments to mitigate FX volatility on costs as well.
Occupancy at Wuhan Meiluote dipped slightly
- Occupancy at Wuhan Meiluote dipped slightly by 0.7% to 85.1% q-o-q mainly due to higher vacancies at the workers’ dormitory at the property. However, the dormitory segment has a very low and insignificant contribution to earnings.
Only 2.6% of leases (by GRI) remain to be renewed for FY19.
- These leases are mainly at the Chongxian Port Logistics, and EC World REIT is confident of renewing them.
Approximately 75% of the leases expiring in 2020 (14.9% of GRI) are attributed to China Tobacco’s lease at Hengde Logistics.
- Despite engaging with the tenant early, EC World REIT expects negotiations to take some time especially given that China Tobacco is a state-owned enterprise. However, early negotiations appear to be positive and we expect China Tobacco to renew its lease.
- With the acquisition of the Fuzhou E-Commerce property, EC World REIT’s portfolio WALE has been extended to 4.3 years, and overall portfolio occupancy stands at 99.2%.
The sponsor, Forchn Group, has recently entered into a RMB5bn JV
- The sponsor, Forchn Group, has recently entered into a RMB5bn JV to create a platform to invest in the development of logistics properties throughout China. Approximately 14 of the properties in the platform will be ready in the next 12-18 months and could be a potential pipeline for EC World REIT.
- These properties have an average price tag of RMB500-700m which translates into a range of RMB3,000-5,000 psqm. We believe that these properties will potentially be accretive for EC World REIT.
We maintain our BUY call on EC World REIT with a similar Target Price of S$0.86.
- A strengthening of the RMB will directly improve earnings and create further upside.
- See EC World Reit Share Price; EC World Reit Target Price.
Derek TAN
DBS Group Research
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Singapore Research
DBS Research
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https://www.dbsvickers.com/
2019-11-11
SGX Stock
Analyst Report
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