Brokers' take: RHB downgrades EC World Reit to 'neutral'; DBS lowers target

RHB has downgraded its call on EC World Reit to "neutral" from "trading buy" and lowered its target price on the real estate investment trust (Reit) to S$0.76 from S$0.87.

In a research report on Friday (Feb 25), analyst Vijay Natarajan said the Reit's high yield of 8.3 per cent and the 0.8 times price to book value limits the downside potential.

He sees "minimal catalysts ahead" for the Reit in the medium term. It could also be susceptible to potential risks such as tighter regulations and financing conditions and a challenging macro environment, he added.

Natarajan attributed the lack of asset sale catalysts to potential purchasers terminating asset deals that the Reit announced in December.

The analyst also lowered distribution per unit expectations by 2 to 3 per cent to factor in tweaking rents and the disposal of Fu Zhuo Industrial.

Fu Zhuo Industrial will have to undergo compulsory expropriation by the Chinese government and will be vacated by March 2022. Natarajan projects that the compensation from the government will be lower than its carrying value.

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Estimated cost of equity has also been raised by 100 basis points to factor in higher market risks.

Meanwhile, DBS Group Research maintained its "buy" call on EC World Reit but lowered its target price to S$0.85 from S$0.90 in a separate research report on Thurday.

The target price implies a 7.4 per cent yield and a price to net asset value ratio of 0.95 times.

The change in target is to reflect the divestment of Fu Zhuo Industrial, the research team said.

DBS believes that the compulsory expropriation and vacating the property by March 2022 will result in a slight dip in the net asset value.

DBS expects an income void of about S$1.8 million going forward on the assumption that Fu Zhuo Industrial will only have 1 quarter of income contribution in FY2021.

However, the team is of the opinion that rental escalations for several of its master leases will be able to offset the absence of income. This will lead to "inherent organic growth" for the trust as well, DBS added.

The research team projects a slight uptick of 0.6 per cent in distribution per unit for FY2022 and said that based on its current price, the Reit expected to generate a forward yield more than 8.3 per cent.

"Although the compulsory expropriation of Fu Zhuo Industrial is a dampener, we continue to like EC World Reit for its resilient cash flows and very high occupancy rates," DBS added.

It is positive that earnings are to "remain robust" as the Reit's portfolio caters to the fast-growing logistics and e-commerce sector. The team also thinks the trust's multi-tenanted assets that cater to the fast-growing logistics industry will potentially deliver revenue growth.

Units of EC World Reit were trading flat at S$0.745 as at 10.37 am on Friday.