Viva Industrial Trust (VIT SP) - Maybank Kim Eng 2017-05-23: Sound Resolution

Viva Industrial Trust (VIT SP) - Maybank Kim Eng 2017-05-23: Sound Resolution VIVA INDUSTRIAL TRUST T8B.SI

Viva Industrial Trust (VIT SP) - Sound Resolution


Swift settlement, BUY 

  • Viva has swiftly resolved its Jackson Square (JS) issue to settle for compensation, and remains entitled to a rental support bank guarantee as well as additional security deposits, with the termination of its facilities management agreement with Jackson International Pte Ltd (JIPL). This outcome is positive and should alleviate earlier concerns on near-term vacancy risks at JS arising from the JIPL subsidiary tenants.
  • We raise FY18 DPU estimates by 5% and our DDM-based TP to SGD0.95.
  • With 27% total return upside, we reiterate BUY.


Update on Jackson Square 

  • Viva reported that it has reached a full and final settlement with Jackson International Pte Ltd (JPIL), resulting in the termination of its facilities management agreement at the Jackson Square (JS) property, which was acquired in Nov 2014. 
  • Viva in turn receives SGD1m from JPIL and remains at liberty to call upon the SGD3.87m rental support bank guarantee in the absence of the rental support at JS. 
  • In addition, JPIL and its subsidiaries will now provide SGD1.73m in security deposits (equivalent to 12 months rental) to maintain their leases at JS.


Positive outcome, vacancy-risk concerns alleviated 

  • The development is positive for Viva, given a swift resolution to the issue at JS which had originated from a liquidation notice received by JPIL a month earlier (on 23 Apr). 
  • Importantly it should dispel concerns on near-term vacancy risks arising from the possible exit of JPIL subsidiary tenants, at 24% of the NLA (19% of gross rental income). 
  • Management further shared that leasing activities to back-fill the remaining vacancies at JS due to McDermott are progressing well.


Raised DPU, new TP at SGD0.95 

  • We adjusted our model assumptions to factor in higher occupancies at JS in FY18E, and raised earnings by 5%. 
  • We see upside risks from our rental estimates on its two business park assets. For now, our DDM-based TP rises to SGD0.95, implying 27% total return upside. 
  • Maintain BUY.


Swing Factors


Upside

  • Earlier-than-expected pick-up in leasing demand driving improvement in occupancy.
  • Better-than-anticipated rental reversion trend.
  • Accretive acquisitions.

Downside

  • Prolonged slowdown in economic activity could reduce demand for industrial space, resulting in lower occupancy and rental rates.
  • Termination of long-term leases contributing to weaker portfolio tenant retention rate.
  • Expiry of rental support mechanisms without corresponding rental reversion uplift from Nov 2018.
  • Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.




Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-05-23
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.95 Up 0.930



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