SINGAPORE (Nov 25): KGI Securities is initiating coverage on EC World REIT (ECW) with an “outperform” recommendation and a target price of 84 cents – representing a total upside of more than 23%, including a divided yield forecast of 9.1% for FY20.

“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 like 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 and occupancy should remain relatively secure and consistent, enhancing income visibility.”

For 3QFY19 ended September, the manager of ECW reported distribution per unit (DPU) of 1.489 cents, 5.2% lower than DPU of 1.570 cents a year ago.

Distribution to unitholders fell 4.4% to $11.9 million in 3QFY19, on the back of a 35.4% jump in finance costs to $9.3 million on higher standby letter of credit (SBLC) and term loan quantum, as well as a $1.5 million foreign exchange loss during the quarter.

3QFY19 gross revenue rose 7.5% 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.

As at end-September, cash and cash equivalents stood at $41.0 million.

To be sure, KGI is not the only brokerage with a bullish view on ECW.

DBS Group Research, Phillip Securities, and RHB Group Research also have “buy” recommendations on ECW, with target prices at 86 cents, 84 cents, and 82 cents, respectively.

In particular, DBS 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 4Q19, 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%,” he notes.

Units in EC World REIT closed 1 cent higher, or up 1.4%, at 74 cents on Nov 25.

According to KGI valuations, ECW currently trades at a FY19F/FY20F price-to-book (P/B) ratio of 0.9 times – a 25% discount to its peers’ average of 1.2 times.