• Successfully listed Elite UK Commercial Holdings Ltd (ECHL) on The International Stock Exchange (TISE) on 26 Aug 2021.
• Benefits of the exercise include lower tax rate and elimination of future tax on gains.
• Reiterate ADD on Elite Commercial REIT (SGX:MXNU) with an unchanged DDM-based target price of £0.826.

Benefiting From the Listing of ECHL on TISE on 26 Aug 2021

• Elite Commercial REIT announced that its wholly-owned subsidiary Elite UK Commercial Holdings Ltd (ECHL) has been successfully listed on The International Stock Exchange (TISE) with effect from 26 Aug 2021.
• The listing of ECHL on TISE is a technical listing and 100% of the shares in ECHL will continue to be held by ECR. According to the management, post this exercise, the tax treatment of Elite Commercial REIT will be on par with other UK REITs and Elite Commercial REIT will enjoy a lower tax rate of 15% vs the current 19%. Other benefits of this exercise indicated by management include
  1. elimination of any future tax on latent gains (and its corresponding provision of deferred tax liabilities) on the properties currently held by Elite Commercial REIT,
  2. competitive advantage over non-UK REITs for future corporate acquisitions as any unrealised gains (and its corresponding provision of deferred tax liabilities) on the properties is expected to be eliminated on acquisition and
  3. the elimination of any future tax on gains, which would enable Elite Commercial REIT to better pursue capital recycling efforts.

Lower Effective Tax Rate to Boost DPU and BV

• Following this exercise, we estimate Elite Commercial REIT’s effective tax DPU by 3% and boost book value per unit by 3.2%.

Tax Benefits Enhance Asset Recycling/inorganic Growth Prospects

• The elimination of any future potential asset enhancement initiatives as the asset offers potential for continued commercial use or conversion or redevelopment for alternative uses.
• Elite Commercial REIT’s gearing stood at 42.1% at end-1H21 with an interest coverage ratio of 6.4x and has minimal near-term refinancing needs.

Reiterate ADD Rating on Elite Commercial REIT

• We tweak up our FY21-23F DPU estimates for Elite Commercial REIT by 0.005%-0.275% rental structure and inorganic growth potential.
• Potential re-rating catalysts could come from rental & Pensions (DWP).

Source: CGS-CIMB Research - 1 Sep 2021