RHB Group Research analyst Vijay Natarajan has upgraded his rating for EC World REIT from ‘neutral’ to ‘trading buy’ after the manager of the REIT announced on May 17 that it has been approached by its sponsor-led consortium for the potential transaction involving all its properties.

Natarajan believes a potential takeover could be on the cards. “[EC World REIT’s] high [forecasted] FY2021 ending December dividend yield of 7.6%, coupled with a logistics-focused portfolio, makes it an ideal acquisition target for funds looking for stable recurring income,” he says in a May 18 research note.

He notes that the REIT’s sponsor Forchn International, which holds a 43.6% stake, is leading talks on behalf of a consortium of purchasers, which may lead to the divestment of its assets.

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The announcement comes after the REIT reported 1Q21 numbers that slightly outperformed Natarajan’s estimates, with distribution per unit (DPU) climbing 32% y-o-oy, mainly due to China’s renminbi strengthening.

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Natarajan points out that the potential offer does not come as a complete surprise, as asset managers and private equity funds worldwide are on the lookout for high yield assets to grow their portfolios, with ultra-low interest rates providing tailwinds. 

“Recent local examples include ARA Asset Management buying a 50% stake in the trustee-manager of Dasin Retail Trust (DASIN SP, NR) as well as a 5% stake in the trust, and the privatisation of Soilbuild REIT by Blackstone-led consortium,” he notes.

Separately, Natarajan notes that the REIT’s Hengde Logistics phase-2 lease was renewed at  8.8% lower effective rental rate, which was below expectations and is expected to result in a 0.8% reduction in overall revenue. He also highlights that occupancy at Wuhan Meiluote dipped 5.2  percentage points q-o-q to 81.3% on the non-renewal of short-term leases signed last year.

SEE:EC World REIT announces potential divestment of properties to consortium of purchasers

On the flipside, no significant impact is expected from the Chongxian Port Investment (CPI) incident, which involved the displacement and collapse of a berth.

Natarajan’s target price for EC World REIT has been raised from 76 cents to 83 cents, reflective raised distribution per unit (DPU) forecasts for FY2021 - FY2023 by 1% - 3% following tweaked interest costr and occupancy assumptions. “We also trim our cost of equity assumption by 30 basis points to 8.8%,” he adds.

As at 4.46pm, units in EC World REIT are up 3.5 cents or 4.67% up at 78.5 cents.