EC WORLD REIT (SGX:BWCU)
EC World REIT - Protected By Master Leases
- EC World REIT (SGX:BWCU)'s 4Q19 and FY19 NPI and DPU were in line with our forecast.
- High income visibility due to portfolio occupancy of 99.9% and WALE of 4.1 years.
- FY19 DPU down 2.1% y-o-y; accretion from Fuzhou E-commerce acquisition wiped out due to FX and timing lag between drawdown of loans and acquisition.
- Maintain BUY with a lower Target Price of S$0.83 (prev S$0.84). Our Target Price translates to a FY20e DPU yield of 8.7%.
The Positives
Solid portfolio to weather turbulence.
- High income visibility due to portfolio occupancy of 99.9%, and WALE by GRI of 4.1 years.
- Post-acquisition of Fuzhou E-Commerce, 84.4% of FY20e revenue is secured through 4 master leases to the Sponsor, with build-in rental escalations ranging 1% to 3%. Hengde Logistics, the specialised logistic asset customized for and leased to a state-owned tobacco company, contributes c.8% to NPI. This brings the percentage of “stable” leases to 91%.
The Negatives
Accretion from the acquisition of Fuzhou E-commerce wiped out.
- DPU -3.8%/-2.1% in 4Q19/FY19 due to FX and higher finance expense and 5% retention of distributable income (DI) in 4Q19. Higher finance expense was due to the timing mismatch of drawdown of loans and the acquisition of Fuzhou E-Commerce and the higher loan quantum. Acquisition financing for Fuzhou E-commerce (completed on 8 August 2019) was done in conjunction with the refinancing of the IPO loans (28 June and 8 August).
- DPU would have been 6.13 cents if 100% of 4Q19 distributable income was paid out, but this would still have been 0.8% lower than FY18 DPU of 6.18cents. 5% of distributable income was retained for working capital purposed and unforeseen circumstances.
Outlook
- The management received notification of non-renewal of 24,929sqm of space on a lease expiring in 2Q20 at Wuhan Meiluote. This represents 50% of Wuhan Meiluote’s NLA of 48,695sqm. Occupancy is expected to fall from 97.7% to 46.7%. This asset contributes 1.6% to gross rental income (GRI) and will not affect DPU materially. Muted leasing demand is expected in the near term.
- 15.7% of leases by GRI is up for renewal in FY20. One of the leases expiring is for space at Hengde Logistics which is leased out to a state-owned tobacco company at below-market rentals. With the country in a state of flux, brought on by the Covid-19 outbreak, management is guiding for flattish rental reversions on leases expiring in FY20.
- Key risk to our valuation remains the weakening of the RMB. The manager has revised its hedging strategy from a put spread to a plain vanilla call option. The previous hedging strategy employed would only protect EC World REIT if FX fluctuated within a collar - exchange movements outside of the collar would mean that EC World REIT would have to take the prevailing market rate. The amended strategy effectively locks in a worst-case exchange rate.
Maintain BUY with lower Target Price of S$0.83 (prev S$0.84).
- We maintain our BUY call with a marginally lower Target Price of S$0.83. This translates to a FY20e/FY21e DPU yield of 8.9%/9.3%.
- 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.
Natalie Ong
Phillip Securities Research
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https://www.stocksbnb.com/
2020-03-05
SGX Stock
Analyst Report
0.83
DOWN
0.840