Excerpts from DBS report

Analysts: Dale LAI & Derek TAN

Divestments to pave the way for refinancing of loans

What’s New
• Lower revenues in 3Q22 due to weaker RMB and lower fees received

EC WORLD REIT 

Share price: 
S$0.44

Target: 
S$0.55

• Divestments on track to be concluded by year end, paving the way to meet other refinancing obligations

• Revised projections to account for divestments and special distribution in FY22

• Maintain BUY, revised TP of S$0.55


Investment Thesis
A unique opportunity to accumulate, S$0.55 TP. Close to a 45% year-to-date (YTD) slide in the share price owing to perceived refinancing issues has sprung up a unique opportunity.

ECWorldChair CEO3.18(L-R): EC World REIT Chairman Zhang Guobiao with CEO Goh Toh Sim. (Mr Zhang is also chairman of the REIT's sponsor, Forchn Holdings Group).
NextInsight file photo.
We see planned balance sheet recapitalisation by the end of 2022 to be positive, with the proposed sale of two properties (Beigang Logistics Stage 1 and Chongxian Port Logistics) to its sponsor, which will potentially allow unitholders to

(i) crystalise NAV and receive a one-off dividend ranging between c.10scts-12 scts and
(ii) reduce their reliance on master leases of the sponsor, which would be positive overall.

Post-sale, we see ECREIT still delivering yields of c.6%.

Will the proposed divestment to sponsor pass the shareholder test? With the manager entering into an MOU with the sponsor for the sale of two assets totalling about S$432.8m (at last valuation), funds received by the REIT will be more than sufficient to pare down its loans (25% by end-Dec 22) and pay a special dividend to unitholders.

Given that it’s an interested party transaction (IPT), we envision unitholders only accepting a deal that is valued close to NAV.

Inherent organic growth in the portfolio underpinned by master leases.
Rental escalations ranging from 1.0% to 2.5% built into its master leases ensures organic growth in ECWREIT’s earnings.

Moreover, its multi-tenanted assets that cater to the fast-growing logistics industry also have the potential to deliver revenue growth.

Valuation:
Our TP of S$0.55 is based on DCF and assumes a discount rate of 8.1% (risk-free rate of 3.5%). This has taken into account the impending divestments.

Where we differ:
In addition to the one-off pre-termination compensation to be paid in FY22, we have also assumed a slight increase in all-in financing costs when maturing loans are refinanced during the year.


Key Risks to Our View:

Key risks include those that are sponsor-related such as failure to extend master lease agreements and challenges in maintaining occupancy.


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