• Stay NEUTRAL and SGD0.55 TP, 6% upside. EC World REIT’s proposed divestment of two assets at a price close to the average of the latest valuations is mildly positive outcome, in our view, under the current difficult scenario faced by it. Unitholders are expected to receive a one-off dividend payment of c.11 SG cents from the sale post bank-mandated debt repayments. On the flip side, the sale diminishes its long-term potential with lower annual dividend income, a smaller asset size, and potentially, lower liquidity.

• A quick recap. In June, the REIT announced that it had only managed to extend the maturity date of its expiring offshore loan (SGD300m or USD87m) and onshore loan facilities (CNY907m) to Apr 2023. The extensions came with a condition by banks that the REIT’s sponsor Forchn Holdings Group Co Ltd provide an undertaking to repay 25% of its offshore loan by Dec 2022 or the REIT will be in default. Subsequently, the REIT signed a non-binding MoU for the sale of Beigang Logistics Stage 1 (BL1) and Chongxian Port Logistics (CPL) to the Sponsor.

• Divestment to raise CNY2.0bn (SGD407m) in proceeds. The REIT announced last week that the Sponsor has agreed to purchase BL1 and CPL at CNY1.2bn (~SGD242.6m) and CNY820.1m (SGD164.1m). The agreed values are slightly above book value and at par with the average of two independent valuations done in June. It also represents a blended 17.8% premium to the IPO’s (Jul 2016) purchase price. Management cited the reason for picking these two assets as they were no longer as attractive due to changing market trends resulting in a decline in asset value over the years, and the need for major capex to redevelop and repair. This transaction will require unitholder approval at the upcoming EGM.

• One-off dividend payment of c.11 SG cents (CNY450.9m) is expected to be declared as special dividend post completion and repayment of 25% of the bank loans. This translates to c.21% yield at current levels.

• Short-term gain, long-term setback. The likely special dividend should support unit prices in the near term. The transaction also provides the much- needed comfort that the Sponsor stands ready to support the REIT in times of crisis. On the other hand, the divestment will reduce total asset size by 27% and lower annual distributable income ahead by c.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 Apr 2023.

• Our numbers currently do not include the divestment impact pending shareholder approval. EC World REIT’s ESG score of 2.4 (out of 4.0) is six notches below the country median. Thus, we apply a 12% ESG discount to its DDM-derived TP.

Source: RHB Research - 10 Oct 2022