EC World Real Estate Investment Trust

Price targets: 84 cents INITIATE OUTPERFORM (KGI Securities Research)

84 cents BUY (Phillip Securities Research) 86 cents BUY (DBS Group Research) 82 cents BUY (RHB Group Research)

KGI Securities is initiating coverage on EC World REIT (ECW) with an “outperform” recommendation and a price target of 84 cents — representing a total upside of more than 23%, including a divided yield forecast of 9.1% for FY2020.

“EC World REIT is the only specialised and e-commerce logistics S-REIT that provides investment access into China’s booming e-commerce industry,” says analyst Amirah Yusoff in an initiation report on Nov 25.

Amirah notes that ECW’s portfolio is “well-diversified” into three main logistics segments — port, specialised and e-commerce logistics — which lends stability to its income.

“China has quickly emerged as a global leader in e-commerce with the rise of technology. This inevitably translates into demand for e-commerce logistics assets, which represent 40% of ECW’s portfolio,” Amirah says.

“With support, too, from the Chinese government to propel the e-commerce and technology space in the coming years, we believe that ECW’s assets are well-positioned to capture the vast growth opportunities,” she adds.

Since its IPO in 2016, ECW’s assets have also enjoyed close to 100% occupancy levels, with the exception of Wuhan Meiluote, which saw its occupancy drop to 85.8% recently after JD.com vacated the property.

However, Amirah points out that the management has been in active discussion with several interested parties regarding the space, and are optimistic on filling occupancy by year-end.

At the same time, the analyst also likes ECW for its strong sponsor, Forchn Holdings Group Co — a well-established operator of port facilities in China with over 20 years of experience.

“A reasonable proportion of the multi-tenanted properties are, directly or indirectly, leased to wholly-owned subsidiaries of the sponsor,” says Amirah. “Therefore, we think that WALE (weighted average lease to expiry) and occupancy should remain relatively secure and consistent, enhancing income visibility.”

For 3QFY2019 ended September, ECW saw its gross revenue increase 7.5% y-o-y to $25.7 million, while net property income (NPI) grew 3.2% to $22.9 million. The better performance was led by contribution from Fuzhou E-Commerce, which was acquired in August 2019, and rental escalation at the other properties.

However, 3QFY2019 distribution per unit (DPU) fell 5.2% to 1.489 cents on the back of a 35.4% jump in finance costs and a $1.5 million foreign exchange loss during the quarter.

To be sure, KGI is not the only brokerage with a bullish view on ECW. In particular, DBS Group Research lead analyst Derek Tan likes ECW’s recent acquisition of the Fuzhou E-Commerce property.

“The recent acquisition of yet another property on master lease will provide further income stability and visibility,” says Tan in a Nov 11 report. “From 4Q2019, the new asset is expected to contribute close to $3.6 million to quarterly NPI and close to 1.6% accretion to DPU.

“With the acquisition of the Fuzhou E-Commerce property, ECW’s portfolio WALE has been extended to 4.3 years, and overall portfolio occupancy stands at 99.2%.”