EC World REIT - DBS Research 2020-02-28: E-commerce Catching The Flu?

EC WORLD REIT (SGX:BWCU)

EC World REIT - E-commerce Catching The Flu?

EC World REIT (SGX:BWCU)'s FY19 DPU of 6.047 Scts slightly below expectations; mainly due to retention of 5% of income.
Retention of income as a prudent measure to support any short-term volatility in earnings.
Expect some near-term challenges to operations due to COVID-19 outbreak.

More than 70% of leases underpinned by master-lease with annual rental escalations.

EC World REIT's FY19 gross revenue of S$99.1m was S$2.9m (3.0%) higher compared to FY18; NPI of S$89.8m was S$2.4m (2.7%) higher y-o-y.
In RMB terms, revenue and NPI were 6.5% and 6.3% higher respectively (y-o-y) mainly due to contribution from Fuzhou E-Commerce which was acquired in August 2019.
Distribution income of S$48.2m, S$0.6m or 1.2% lower than FY18 mainly due to foreign exchange differences and timing difference between the loan drawdown and the completion of the acquisition of Fuzhou E-Commerce in 3Q19; further amplified by the 5% retention in distributable income. Without the retention in distributable income, DPU would have been 1.3% higher or 6.13 Scts for FY19.
We understand that the retention of income was mainly as a prudent measure to bolster any volatility in short-term earnings and will not be a recurring item. This retained income could be distributed if not utilised.
In 4Q19, NPI of S$24.5m was 6.8% higher q-o-q mainly due to income contribution from Fuzhou E-Commerce.
Increase in DPU to 1.51 Scts was 1.4% higher q-o-q; partially offset by higher finance cost for the Fuzhou E-Commerce acquisition.

A tenant from the Wuhan Meiluote property, likely to be in the e-commerce business, has notified EC World REIT on its non-renewal of approximately 25,000 sqm of space; 50% of the property’s NLA.
Despite this lease potentially leading to a c.35% decline to property’s full-year income, we expect the impact on overall portfolio revenues to be not more than 0.4%.
EC World REIT anticipates that some tenants may request for rental rebates to tide through this period, and it will evaluate each request on a case-by-case basis.
Wuhan Meiluote remains closed due to the government’s mandatory shutdown of operations in the city; the other assets have resumed operations after an approximate one-month closure. We understand that the other properties are operating at 50-70% capacity since resuming operations.
We believe that the port logistics properties may also face some challenges as they deal mainly with construction materials such as steel and cement.
Rent renewals in FY20 may face some challenges due to pessimism in business activity caused by COVID-19; may see lower occupancy rates and/or negative rental reversions. Key renewal to look out for in FY20 is the lease with China Tobacco at Hengde Logistics (which accounts for half of the 15.7% of lease expiries in FY20); lease negotiations have been put on hold for now due to the pandemic.

All-in running cost of borrowing inched down slightly from 4.6% in 3Q19 to 4.4% in 4Q19.
Portfolio valuation increased 20.6% to RMB 8.1bn mainly due to addition of Fuzhou E-Commerce; valuation of portfolio on a like-for-like basis would have been up 1.5% y-o-y.
Increase in portfolio valuations attributed to compression in cap rates from approximately 6.25- 6.5% to the current average of c.6%. Higher valuation led to a decline in gearing from 39.6% to 38.7% q-o-q.
Portfolio occupancy improved to 99.97%; but could potentially fall to c.97% with the non-renewal of the tenant at Wuhan Meiluote.
Approximately 15.7% of leases (by gross revenue) will be due in FY20 and it remains to be seen how the COVID-19 outbreak will impact rental reversions.
More than c.72% of the portfolio are on master-leases and should provide income visibility with the built-in rental escalations.

We continue to like EC World REIT for its large proportion of master-leases with annual rental escalations.
We project FY20 DPU to increase by c.3.5% due mainly to additional income from Fuzhou E-Commerce and in-built rental escalations at master-lease properties.
However, we revised our Target Price down to account for near-term challenges to operations caused by COVID-19, as well as potential declines in occupancies and/or negative rental reversions.
See EC World Reit Share Price; EC World Reit Target Price; EC World Reit Analyst Reports; EC World Reit Dividend History; EC World Reit Announcements; EC World Reit Latest News.
We will revisit our forecasts once there is more certainty over the impact of COVID-19 on EC World REIT’s operations and earnings.

Derek TAN DBS Group Research | Singapore Research DBS Research | https://www.dbsvickers.com/ 2020-02-28

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