DBS Group Research analysts Dale Lai and Derek Tan have maintained their ‘buy’ rating on EC World REIT with an unchanged target price of 80 cents.

While rental rebates and retention of distributable income in light of Covid-19 impacted the REIT’s FY2020 performance with a lower than expected distribution per unit (DPU) of 5.36 cents, Lai and Tan note that portfolio occupancy has rebounded as of 4QFY2020.

SEE:EC World REIT reports lower 4QFY2020 DPU of 1.427 cents

‘During the quarter, EC World REIT successfully backfilled vacancies at the Wuhan Meiluote property (86.5% vs. 35.0%), and we believe that the REIT will be able to continue leasing out available space at the property and sustain its strong overall portfolio occupancy rate of 99.3%,” they explain.

15% of EC World REIT’s leases are up for expiry in 2021. Lai and Tan believe that built-in rental escalations on the remaining 75% of master leases provide income visibility while also enabling organic growth in earnings. They expect renewals in FY2021 to remain relatively flat.

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“We understand that management will be aiming to sign short-term leases for renewals as market rents are relatively weak currently and do not reflect the true potential rents of the properties,” they add.

The analysts continue to like EC World REIT given its exposure to the fast-growing e-commerce and logistics sector in China, with 50% of its assets in e-commerce logistics, 25% in port logistics, and 25% in specialised logistics.

Lai and Tan are projecting a 12% rebound in FY2021 DPU, implying an attractive forward yield of 8.3%. They also anticipate a higher payout ratio of 95% of the REIT.

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“As we do not anticipate any further rent rebates arising from the COVID-19 pandemic too, the return to full income distribution and potentially the return of some of the earlier retained income will be a positive surprise to FY2021 DPU,” they add.

Their target price of 80 cents is based on DCF with an assumed discount rate of 8.1% (risk-free rate of 3.0%). It assumes a target yield of 7.5% and a P/NAV of 0.9 times.

Shares in EC World REIT closed 0.5 cents or 0.6% lower at 73 cents on March 4.