EC World REIT - RHB Invest 2020-05-14: Defensive Master Leases, Resilient In Logistics


EC World REIT - Defensive Master Leases, Resilient In Logistics

  • Keep BUY, new SGD0.76 Target Price from SGD0.78, 12% upside with 8% FY20F yields.
  • EC World REIT’s 1Q20 numbers show resilience from underlying master leases and its logistics portfolio. One-off rental rebates totalling CNY23.7m were also lower than our initial estimate. The REIT’s pure-play exposure to the logistics segment, and long master leases, as well as the gradual recovery of the China market puts it in a relatively good position.
  • Valuations are reasonably attractive, at 0.8x P/BV.

A decent 1Q20 despite challenges.

  • EC World REIT (SGX:BWCU)'s 1Q20 headline revenue and NPI declined 1.4% and 0.2% y-o-y, mainly due to CNY23.7m worth of rental rebates given (~0.5 months) to tenants for March. However, this was partly offset by contributions from Fuzhou E-Commerce, which it acquired in Aug 2019.
  • EC World REIT's DPU, however, declined by a steeper 23% y-o-y – due to the retention of 5% of distributable income (95% payout ratio), and 50% of management fees paid in cash (100% in units previously) in addition to rental rebates.
  • Management noted that rental rebates are one-off in nature, and does not see the need to provide additional rebates, at this juncture. The retention of distributable income is a prudent measure, and management may choose to distribute it – if there is a sustained market recovery.

Majority of 2020 leases likely to be renewed.

  • With China easing lockdown measures, most underlying operations are returning to normal. About 15% of EC World REIT’s leases by rental income are due for renewal in FY20, with the bulk coming from Hengde Logistics (HL) and the rest from Wuhan Meiluote (WHML) and Chongxian Port Logistics (CPL). For Hengde Logistics and Chongxian Port Logistics, management remains confident of extending its current leases but expects flattish rental reversions vs rental growth expectations previously.

Wuhan Meiluote accounts for less than 2% of NPI

  • Wuhan Meiluote accounts for less than 2% of EC World REIT's NPI and has been the most impacted, with one anchor tenant having already given notice of not renewing its lease, upon the expiry date in 2Q20. The lease of another anchor tenant is due for renewal later this year – and this is now in negotiations. While there is some near-term downside risks to occupancy for this asset, the overall impact to earnings remains negligible.

No refinancing needed until 2022.

  • EC World REIT’s combination of onshore (33%) and offshore debt (66%) facilities are only due for refinancing in Jun 2022. 100% of onshore facilities are fixed. Gearing remains modest at 38.6%, which is well below the new 50% threshold limit.
  • EC World REIT also manages FX risks by using FX options to lock in 6-month forward income.

We trim FY20-22F DPU

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-05-14
SGX Stock Analyst Report BUY MAINTAIN BUY 0.76 DOWN 0.780