June 8, 2021

Seeking potential listing on TISE

■ECR has proposed the potential listing of its wholly-owned subsidiary Elite UK Commercial Holdings Limited on The International Stock Exchange (TISE).

■Successful TISE listing lowers income tax rate from 19% to 15% and eliminates capital gains tax in the UK, enhancing ECR’s distributable income, in our view.

■Reiterate Add with a higher DDM-based TP of £0.83.

Proposed listing of Elite UK Commercial Holdings Limited 

Elite Commercial REIT (ECR) announced on 4 Jun 2021 that the REIT is currently in the process of applying for Elite UK Commercial Holdings Limited(ECHL), a wholly-owned subsidiary of ECR to be listed on The International Stock Exchange (TISE). ECHL will be listed on the TISE as a listed UK REIT and ECR will continue to hold 100% of the shares in ECHL. The proposed listing of ECHL is expected to be completed by 3QFY21F, according to the manager.

Successful TISE listing will offer ECR favourable tax treatment

Key reasons for the proposed listing of ECHL are:1) ECR will be able to be placed on the same level with other UK REITs in terms of tax treatment; 2) ECR expects its principal tax rate will be reduced from 19% to 15% post listing of ECHL pursuant to the Double Taxation Treaty between UK and Singapore; and 3) any latent capital gains as well as its corresponding deferred tax liabilities arising from its properties will be eliminated. We expect the potential reduction of income tax by 4% pts and elimination of capital gains tax from the listing of ECHL to enhance cash flows and increase ECR’s distributable income. We understand from the management that this is a technical listing and transaction costs would be minimal.

Strong balance sheet and 100% occupancy

ECR continues to maintain a healthy debt maturity profile with a bridge loan of £9m due in FY22F and will not face major refinancing risks until FY23F, in our view. The REIT had an aggregate leverage of 42.1% and an interest coverage ratio of 7.4x as at end-1QFY21. The REIT also has a 100% occupancy rate and received in advance 99.9% of its 2QFY21 rent as at end-1QFY21, according to the manager.

Reiterate Add, with higher DDM-based TP of £0.83

We raise ourFY21F-23FDPU by 1.2%-4.5% as we bake in our lower income tax rate assumptions of 15% (previously 19%) for 4QFY21F and FY22-23F.As the listing is expected to be completed in 3QFY21F,ECR will be subjected to the prevailing UK corporation tax rate prior to ECHL’s admission into TISE. We retain our Add call with a higher DDM-based TP of £0.83. We like ECR’s stable income profile, with built-ingrowth through its inflation-linked rental structure and inorganic growth potential. Potential re-rating catalysts could come from rental uplifts for the majority of its portfolio in FY23F.

ADD by CGS-CIMB Research. Share price closed at $0.67.