DBS Group Research analysts Dale Lai and Derek Tan think there is a “unique opportunity” to accumulate shares of EC World REIT, given that its share price has fallen about 45% ytd due to perceived refinancing issues.
Nonetheless, they have maintained their “buy” call on EC World REIT, but have trimmed their target price from 70 cents to 55 cents.
The analysts note the ongoing proposed divestment of two of EC World REIT’s assets of about $432.8 million and see this as a “positive” for the REIT.
They refer to the divestment of Beigang Logistics Stage 1 and Chongxian Port Logistics, which is expected to be completed by the end of the year.
Once completed, the bulk of the proceeds will be used to repay debt, and the remaining is to be distributed as a special distribution. Lai and Tan say this will alleviate concerns about EC World REIT’s debt obligations and pave the way for it to refinance its other outstanding loans.
Gearing is relatively stable at 39.3%, and it is expected to improve slightly once RMB862.6 million ($166.7 million) in loans are repaid with the divestment proceeds.
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This will also potentially allow unitholders to crystalise NAV and receive a one-off dividend ranging between 10 to 12 cents, as well as reduce their reliance on master leases of the sponsor.
“Post-sale, we see EC World REIT still delivering yields of about 6%,” they think, despite the fact that distribution per unit (DPU) is expected to decline by about 29% and net asset value (NAV) will be reduced by 14%.
However, the question from the analysts is: will shareholders approve the divestment?
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They say that “given that it’s an interested party transaction, we envision unitholders only accepting a deal that is valued close to NAV.”
EC World REIT also has inherent organic growth in the portfolio underpinned by master leases, with Lai and Tan highlighting that there are rental escalations ranging from 1% to 2.5% built into its master leases.
This ensures organic growth in EC World REIT’s earnings, and its multi-tenanted assets that cater to the fast-growing logistics industry also have the potential to deliver revenue growth.
However, other than the rental escalations, the analysts say that there is a lack of growth catalysts, and “it is unclear how soon EC World REIT can resume its growth plans and embark on future acquisitions again.”
This also explains their lower target price, as they account for the absence of income from divestments of the two assets by the year-end, as well as the lower NAV due to the special distribution.
Shares of EC World REIT closed flat at 44 cents on Nov 10, with a FY2022 P/NAV ratio of 0.5 and dividend yield of 12.1%.
