Soilbuild Business Space Reit - DBS Research 2017-01-25: Negatives Priced In

Soilbuild Business Space Reit - DBS Vickers 2017-01-25: Negatives Priced In SOILBUILD BUSINESS SPACE REIT SV3U.SI

Soilbuild Business Space Reit - Negatives Priced In

  • FY16 DPU down 6.1% despite increase in top line due to an enlarged unit base.
  • Revaluation loss was mainly due to write-off at Loyang Way.
  • Rental reversion outlook remains weak.
  • Revised TP down to S$0.70 due to NAV decline.



BUY maintained with revised TP of S$0.70. 

  • With a dividend yield of over 8%, Soilbuild Business Space Reit (SBREIT) offers one of the highest yields in the industrial space. Despite operational headwinds, we believe that the worst is over. 
  • SBREIT’s recent asset acquisition will diversify its portfolio, and updates on backfilling of vacated space at 72 Loyang Way will increase investor confidence for the stock. 
  • Maintain BUY.


Acquisition of Bukit Batok Connection to drive earnings as portfolio undergoes tenant churn. 

  • The timely acquisition of Bukit Batok Connection from sponsor Soilbuild Group will diversify the REIT’s earnings. This more than compensates for potential operational headwinds from other assets in the portfolio. 
  • In addition, the Manager is actively re-tenanting 72 Loyang Way where the previous tenant Technics had defaulted and since vacated. We understand that the Manager is in discussions with potential tenants for a substantial portion of the space but at lower rents.


Look out for asset revaluation. 

  • As we had anticipated, valuation for its portfolio (excluding Bukit Batok Connection) had softened by 3.9% in 4Q16. 
  • NAV fell by 10.0% in FY16 due to an enlarged unit base. As a result, gearing was pushed up to 37% from 36%. 
  • We expect additional revaluation losses of up to 10% to occur in FY17 mainly from weaker net property income portfolio-wide. Gearing could inch up by another c.100bps which is still within the REIT’s comfortable level.


Valuation

  • We revised our DCF-backed TP to S$0.70 from S$0.75, on the back of NAV devaluation. 
  • Maintain BUY, supported by an attractive yield over 8.0%.


Key Risks to Our View

  • Interest rate risk. Rise in interest rates will have a negative impact on distributions but such risk has been substantially hedged with a high percentage of fixed-rate borrowings.




Derek TAN DBS Vickers | Singapore Research Team DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-01-25
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.70 Down 0.750





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