EC World REIT - Phillip Securities 2020-03-05: Protected By Master Leases


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.


  • 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).

Natalie Ong Phillip Securities Research | 2020-03-05
SGX Stock Analyst Report BUY MAINTAIN BUY 0.83 DOWN 0.840