EC World REIT: 10% drop in price an opportunity for a tactical trade.
- Stock declined 10% on the back of fears that the REIT face road-bumps in its debt refinancing.
- Emphasis of matter raised by auditors is not new, manager is in final stage of negotiations with lenders to be announced soon.
- Operational and financial metrics have improved in FY21 with Interest coverage ratios (“ICR”) providing good buffers for lenders.
- Opportunity for a tactical trade, TP S$0.85 maintained.
What has happened
EC World REIT (“ECREIT”) announced that the independent Auditors report in the 2021annual report included an emphasis of matter relating to the material uncertainty related to the going concern of ECREIT given that the current liabilities of ECW exceed the current assets. This uncertainty relate to the uncertainty on the ability of EC World REIT and its subsidiaries to refinance their existing borrowings before they become due for repayment.
ECREIT stock is down 10% to S$0.655 Scts after the close of trading on the 8th April 2022.
What we think
Is the risk of ECW inability of refinance its loans real?
This emphasis of matter from the auditors brings back memories of a fellow China focused retail S-REIT which announced a series of short term loan extensions of their expiring debt from July’21 raised fears that the liquidity crunch within China has tightened the REIT’s ability to secure funding from their consortium of banks. For ECREIT, a majority of its worth S$ 708m is due in May’22 and Jul’22 which at the time of preparation of the financial statements, the manager has not finalised the refinancing of these loan facilities and thus the auditors raised this “emphasis of matter” to highlight on a “on-going concern” basis but not conclude that ECREIT is unable to continue as a going concern.
We understand that the management is in final negotiations with its consortium of banks and remains confident in refinancing its debt successfully prior to the maturity of the term loans. In fact, the auditors a similar emphasis of matter back in ECW 2018 annual report when the debt refinancing was due in Jul’19
Financial metrics remain steady in FY21 results; ICR ratios have improved in FY21.
In relation to the financial analysis of its last reported financials in FY21 published in middle of Feb’22, Insights Direct – EC World REIT, we note that operational metrics and financial metrics have improved with the manager paying a 16% rise in DPU for FY21 and a c.3% rise in valuations. Gearing remain stable at 38%. The compulsory acquisition of an asset Fu Zhuo Industrial by the government is expected to bring in cash proceeds for the REIT, fund which we believe will be utilised to repay it debt or capital repayment to unitholders.
Interest coverage ratio as at 4Q21 stands at 2.92x (above the regulatory floor of 2.5x that MAS has put in place to allow REITs to gear up to 50%). We note that this ICR ratio has been fairly stable over time and has improved from the 2.62x reported in FY20 results. This gives us comfort that the ECW have sufficient buffers to continue servicing its cost of debt
A possible tactical trade and what are possible catalyst?
We see a possible tactical trade on recent price weakness for ECW given that P/NAV have dipped below – 1 standard deviation, a level that was last seen in the COVID-19 crisis. While we await management further updates on the loan refinancing, we do see a widespread of refinancing issues amongst the China focused S-REITs, especially for ECW where it financial metrics are seen to be improving coupled with a fairly long WALE of 2.7 years (by rental income). Catalysts: (i) manager’s update of refinancing of its debt (ii) possible asset sales.
