EC World REIT is expecting a gradual resumption of normal operations across all its assets and increased demand for e-commerce logistics assets post-Covid-19. As such, RHB analyst Vijay Natarajan is maintaining “buy” on the REIT with an increased target price of 76 cents.
Barring one-off rebates and retention, 2H2020 should be stronger, says Natarajan. 2Q2020 distributable income rose 0.5% y-o-y, mainly due to the contribution from Fuzhou E-Commerce, which the REIT acquired in August 2019.
“Distributable income rose 26.4% q-o-q on the absence of one-off rental rebates given in 1Q2020. EC World REIT retained 10% of distributable income during the quarter, in light of uncertainties. We expect 2H2020 DPU to increase by 10% h-o-h, with the absence of rental rebates and steady contributions from master leases and other assets,” he writes in an August 12 note.
EC World REIT was established with the strategy of investing principally in a diversified portfolio of income-producing real estate. The latter assets are used primarily for e-commerce, supply-chain management, and logistics purposes. The REIT also focuses on real estate-related assets. The initial geographical focus is the People’s Republic of China.
On July 2, EC World REIT announced that its then-CIO Li Jinbo was under investigation by the Commercial Affairs Department and the Monetary Authority of Singapore. It confirmed that the investigation was conducted at the personnel level and has no implications on the REIT. Li has since left the firm.
Natarajan expects a majority of 2H2020 leases to be renewed. About 13% of leases by gross rental income are due for renewal in 2H2020, with the majority coming from the expiry of leases at Hengde Logistics.
Management noted the good progress on ongoing discussions with underlying tenant China Tobacco Zhejiang Industrial and expects the tenant to stay. However, due to the challenging market conditions, it does not expect any rental uplift from the asset.
The other lease expiries are for Chongxian Port Logistics, for which it still sees good demand – but weakness is expected in Wuhan Meiluote (WML), located in the city most impacted by Covid-19, though WML accounts for less than 2% of net profits interest.
On e-commerce, asset acquisitions are likely in 2021, says Natarajan. While EC World REIT’s focus in 2H2020 will be on operations, it also sees the possibility of acquiring some e-commerce and other logistics assets from its sponsor.
While China will remain its key market, it has also started to explore Australia and Europe for potential opportunities. The REIT manager reiterated that DPU and yield accretion will be the key criteria for any acquisition.
Gearing is at a modest 39.1%, well below the new 50% cap. There will be 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. The REIT also manages foreign exchange (FX) risks by using FX options to lock in 6-month forward income.
As at 10.51am, units in EC World REIT are trading at 0.5 cents lower, or 0.76% down, at 65 cents.
