Excerpts from DBS Research report

Analysts: Dale Lai & Derek Tan

A bargain despite refinancing hurdles

Investment Thesis
A unique opportunity to accumulate, S$0.70 TP. A close to 40% year-to-date (“YTD”) slide in share price owing to perceived refinancing issues has sprung up a unique opportunity.

EC World REIT

Share price: 
54 c

Target: 
70 c

We see planned balance sheet recapitalisation by end of 2022 to be positive with the proposed sale of two properties to sponsor which will potentially allow unitholders to
(i) crystalise NAV and receive a one-off dividend ranging between c.10scts – 18 scts, and
(ii) reduce reliance on master-leases to Sponsor to be overall positive.
Post-sale, we see ECREIT still delivering yields of c.8%.


Will the proposed divestment to sponsor pass the shareholder test?
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.
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.

Opportunity to bargain hunt?

"Based on ECWREIT’s historical trading price trend, the shares typically trade at a 10%-15% discount to NAV. Applying this same discount to its revised NAV according to the various scenarios, it looks like that the recent share price correction has been overdone. Its current share price implies discounts of between 33%-51% to its revised NAV, and we believe that this presents an opportunity to bargain hunt."

Given that it’s an interested party transaction (“IPT”), we envision unitholders should only accept a deal that is close to its NAV.

Inherent organic growth in the portfolio underpinned by master leases. With built-in rental escalations ranging from 1.0% to 2.5% for its master leases, this ensures organic growth to ECWREIT’s earnings.

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

Valuation:
Our TP of S$0.70 is based on DCF and assumes a discount rate of 7.9% (risk-free rate of 3.0%). Our TP implies an 8.1% yield and a P/NAV of 0.75x.

Where we differ:
In addition to the one-off pre-termination compensation to be paid in FY22, we have also assumed an 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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