EC World REIT - RHB Invest 2020-03-02: Near-Term Headwinds; Long-Term Outlook Intact


EC World REIT - Near-Term Headwinds; Long-Term Outlook Intact

  • Keep BUY, new SGD0.78 Target Price from SGD0.82, 10% upside and c.9% yield.
  • EC World REIT (SGX:BWCU)'s 4Q/FY19 DPU came in slightly below due to lower pay-out ratio and FX impact.
  • While EC World REIT’s China logistics assets are relatively less impacted from the COVID-19 outbreak, underlying economic activity remains low. This is likely to result in short-term rent rebates and lower rent growth.
  • Despite uncertainties, we remain optimistic on long-term prospects, and maintain BUY as valuations are attractive at 0.8x P/B and 8.6% yield.

4Q19 DPU down 3.1% y-o-y

  • EC World REIT's 4Q19 DPU down 3.1% y-o-y as EC World took a prudent approach to pay out only 95% of distributable income in light of uncertainties ahead.
  • Overall FY19 DPU fell 2.1% y-o-y, mainly due to weakening of the CNY vs SGD.
  • Portfolio valuation (excluding the newly acquired Fuzhou E-Commerce) rose 1.5% y-o-y on the back of 25-30bps cap rate compression. For FY20, we expect the positive impact from acquisition and master lease rent step-up to be offset by slightly lower occupancy and rent growth.

WHML remains closed, but accounts for < 2% NPI.

  • Wuhan Meiluote (WHML), which is located at the outbreak epicentre, remains closed. One anchor tenant occupying half the space has notified non-renewal of its leases upon expiry in 2Q20.
  • As the situation remains fluid, management does not expect occupancy to be ramped up soon. However, the impact on bottomline and DPU is minimal as the asset accounted for only 1.6% of 2019 net property income (NPI).

Hangzhou assets commenced operations.

  • The remaining seven key assets have commenced operations, but underlying economic activity in the assets remains way below normal due to staff shortages and travel restrictions. EC World REIT manager also noted several managers in China have committed to certain rental rebates, and expects similar requests from its tenants. It will review such rental rebate requests (including sponsor assets) on a case-by-case basis.

Expect flattish rent reversion for FY20.

  • About 16% of leases by rental income are due for renewal in FY20, with Hengde Logistics and Chongxian Port Logistics (CPL) accounting for the bulk. While Hengde Logistics is likely to extend their long lease, we do not expect any rental uplift due to current market conditions, vs 5-10% rent increase previously.
  • Similarly, we expect rent reversions for CPL’s lease renewals to be flattish at best. We do not expect any acquisitions in the near term (FY20), and expect management to focus on its operations instead.

Earnings changes.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-03-02
SGX Stock Analyst Report BUY MAINTAIN BUY 0.78 DOWN 0.820