RHB Group Research analyst Vijay Natarajan has kept a “neutral” rating on EC World REIT (ECW) with an unchanged target price of 55 cents.
In June, the REIT announced that it had only managed to extend the maturity date of its expiring offshore loan and onshore loan facilities to April 2023. The extensions came with a condition by banks that the REIT’s sponsor Forchn Holdings provide an undertaking to repay 25% of its offshore loan by December or the REIT will be in default.
Subsequently, the REIT signed a non-binding memorandum of understanding (MoU) for the sale of Beigang Logistics Stage 1 (BL1) and Chongxian Port Logistics (CPL) to Forchn Holdings.
See: EC World REIT to divest indirect interests in Bei Gang Logistics and Chongxian Port Logistics for $276.0 mil
Forchn Holdings agreed to purchase BL1 and CPL at RMB1.2 billion ($242.6 million) and RMB820.1 million respectively. The agreed values are slightly above book value and at par with the average of two independent valuations done in June, observes Natarajan. “It also represents a blended 17.8% premium to the IPO’s (July 2016) purchase price,” he adds.
Management cited that these two assets were picked as they were no longer as attractive due to changing market trends, resulting in a decline in the assets’ value over the years and the need for major capex to redevelop and repair. Moving forward, this transaction will require unitholder approval at the upcoming extraordinary general meeting (EGM).
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“The REIT’s proposed divestment of two assets at a price close to the average of the latest valuations is a mildly positive outcome, in our view, under the current difficult scenario faced by it,” writes Natarajan.
Unitholders are expected to receive a special one-off dividend payment of approximately 11 cents from the sale, following the completion and repayment of 25% of the bank loans. This translates to an approximate 21% yield at current levels.
Natarajan observes how the likely special dividend should support unit prices in the near term. “The transaction also provides the much needed comfort that Forchn Holdings stands ready to support the REIT in times of crisis,” says the analyst.
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However, Natarajan also observes that the sale diminishes its long-term potential with lower annual dividend income, a smaller asset size, and potentially lower liquidity.
With the divestment, the REIT’s total asset size will be reduced by 27% and lowered annual distributable income ahead by approximately 30%. “The REIT also faces limited inorganic growth potential considering the banks’ limited support, and it is likely to face higher interest costs upon refinancing in April 2023,” notes the analyst.
As at 10.50am, units in ECW are trading flat at 52 cents at a FY2022 P/B ratio of 0.56x and dividend yield of 10.6%.
