Attractive yields should more than offset surprise compensation payment
- Unwelcome surprise from pre-termination compensation to tenant
- Organic growth in portfolio to more than offset absence of income from Fu Zhuo Industrial
- Earnings in FY23 expected to rebound by more than 6% following one-off compensation paid this year
- Maintain BUY with revised TP of S$0.70
Investment Thesis
Revising our TP to reflect divestment of Fu Zhuo Industrial. ECWREIT has demonstrated its portfolio resilience by reporting improving earnings and stable occupancy rates. However, Fu Zhuo Industrial has undergone a compulsory expropriation by the local government and has ceased income contribution from 1 April 2022. Although built-in rental escalations from its master leases will more than offset the absence of income, ECWREIT is liable for a one-off pre-termination compensation of c.S$4.1m to its tenant.
Leveraged on e-commerce. Earnings are expected to remain robust, as its portfolio caters to the fast-growing logistics and e-commerce sector; 50% of assets are e-commerce logistics and 25% each in port logistics and specialised logistics.
Inherent organic growth in the portfolio underpinned by master leases. With built-in rental escalations ranging from an average of 1.0% to 2.5% for its master leases, this ensures organic growth to ECWREIT’s earnings. Moreover, its multi-tenanted assets that cater to the fast-growing logistics industry also have the potential deliver revenue growth.
Valuation:
Our TP of S$0.70 is based on DCF with an assumed discount rate of 7.9% (risk-free rate of 3.0%). Our TP implies an 8.1% yield and a P/NAV of 0.75x.
Where we differ:
In addition to the one-off pre-termination compensation to be paid in FY22, we have also assumed an increase in all-in financing costs when maturing loans are refinanced during the year.
Key Risks to Our View:
Key risks include those that are sponsor-related such as failure to extend master-lease agreements and challenges in underlying occupancy.