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


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.

FY19 DPU of 6.047 Scts; 98% of our full-year forecast

  • 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.

Challenges posed by ongoing COVID-19 pandemic

  • 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.

Healthy operational metrics

  • 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.

Maintain BUY with a lower Target Price of S$0.80

Derek TAN DBS Group Research | Singapore Research DBS Research | 2020-02-28
SGX Stock Analyst Report BUY MAINTAIN BUY 0.80 DOWN 0.860