• EC World REIT's 4Q18 DPU up 4.4% y-o-y to 1. 57 Scts.
• Master lease extension may soon materialise, and spur a re-rating as overhang EC World REIT’s medium-term growth outlook is removed.
• Low gearing signals acquisition capacity which will provide further upside if it happens.
• Maintain BUY; Target Price of S$0.86.

What’s New

4Q18 results within expectations.

• EC WORLD REIT (SGX:BWCU) reported a stable set of 4Q18 results.
• Revenue and net property income increased by 13.5% and 16.1% y-o-y to S$23.5m and S$20.8m respectively. The increase was mainly driven by the contribution from Wuhan Meiluote, which was acquired in April-18, aided by the in-built rental escalations and accounting adjustments for effective rent and deposits. Excluding this impact, topline and net property income would have risen by 1.8% and 2.6% respectively.
• Finance cost was 5.5% higher y-o-y mainly due to additional loans undertaken to fund the purchase of Wuhan Meiluote.
• Distributable income rose by 5.4% y-o-y to S$12.4m. DPU rose by a smaller 4.4% y-o-y (flat q-o-q) to 1.57 Scts given the enlarged base.
• On a full year basis, EC World REIT's distributable income came in at S$48.8m, up 3.6% y-o-y and in line with our projection of S$48.1m on the back of 5.3% and 5.6% rise in revenues and net property income to S$96.3m and S$87.3m respectively. The better performance was mainly acquisition-led.

Near term refinancing needs to be addressed.

• Gearing remains stable at 31.5% which we believe is a conducive level for acquisitions. Debt cost remains stable at 4.3% (all-in interest rate of 5.2%).
• We understand that the Manager is in active discussions to address EC World REIT’s upcoming refinancing obligations in FY19F.

Proposed Renewal of Master Lease a Positive Surprise

• Separately, EC World REIT announced the proposed entry into new master lease agreements with wholly-owned subsidiaries of the Sponsor for the following properties:
  1. Stage 1 properties of Beigang Logistics,
  2. Chongxian Port Investment, and
  3. Fu Heng Warehouse.
• As this is deemed to be an interested party transaction, an extraordinary general meeting (EGM) will be called for unitholders to vote on this.
• We estimate that the 3 master leases contribute close to 69% of our estimated FY19F-20F topline. With the existing master leases expiring in 4Q20, the significant improvement in income certainty over the medium term secured through the master lease extension will be a positive catalyst for EC World REIT, in our opinion.
• In addition, built-in escalations in the new proposed master lease ranging between 1-2% p.a. will provide EC World REIT with a stable organic growth profile in the medium term.
• Assuming unitholders approve the extension of the proposed master lease, EC World REIT’s weighted average lease expiry (WALE) will be extended from 2.0 years to 4.8 years.

Source: DBS Research - 26 Feb 2019