Viva Industrial Trust - High growth visibility in FY17 – reiterate BUY
- Reaping rewards at Viva Business Park (VBP).
- McDermott non-renewal.
- Fair Value increases to S$0.80.
FY16 results within expectations
- Viva Industrial Trust’s (VIT) results were within expectations.
- FY16 DPU dropped 0.6% to 6.958 S cents, or 95% of our full-year forecast, as dilution from last year’s placement in 4Q16 had yet to be accompanied by income contribution from the Chin Bee acquisition, which was only completed in Jan 2017.
- FY16 gross revenue and NPI increased 28.6% to S$95.1m and 34.7% to S$68.5m respectively. Both came up to 102% of our forecast.
Beyond Chin Bee, growth visibility at VBP and potential for strong rental reversions at UEBH
- In 2017, beside new contributions from Chin Bee property, we anticipate strong growth prospects at Viva Business Park (VBP).
- While VIT has achieved 94.9% committed occupancy for the VBP “white space” as at 31 Dec 2016, we note that only 58% of total “white space” contributed to 4Q16 income with the rest of the occupants yet to start their leases. We expect all remaining ~37% of space to start contributing to revenue in stages by end 2017 – VBP’s revenue and NPI is forecasted to increase 23% and 30% YoY respectively in FY17.
- In 2018, we are optimistic on the UE Bizhub (UEBH) rents with the Downtown line connection due to open at Expo and forecast a ~10% rental reversions for lease renewals.
Trading at 10.0% yield
- In terms of risks, we note that a large tenant at Jackson Square (JS), McDermott (which currently contributes around 3.7% of VIT’s monthly rental income) will not be renewing its lease expiring in Apr 2017. JS is currently protected by a rental guarantee arrangement till Nov 2019. We currently assume that only ~3/4 of the vacated space will be leased out by Nov 2019.
- While we view the non-renewal as a negative, we note that McDermott is one of VIT’s only O&G tenant and expect few repeats of this scenario. After adjusting our forecasts for VBP, UEBH, and JS, our fair value estimate increases from S$0.78 to S$0.80.
- As of now, VIT is trading at 10.0% FY17 forward yield.
- We reiterate our BUY rating on VIT.