Soilbuild Business Space REIT - DBS Research 2016-07-14: Negatives priced in

Soilbuild Business Space REIT - DBS Research 2016-07-14: Negatives priced in SOILBUILD BUSINESS SPACE REIT SV3U.SI 

Soilbuild Business Space REIT - Negatives priced in

  • 2Q16 results in line. DPU slid by 3.1% to 1.565 Scts despite NPI growth due to enlarged unit base.
  • Occupancy continues to drop mainly due to non- renewals from West Park BizCentral.
  • Debt profile stays healthy with average maturity of 3.4 years and 100% interest hedged to fixed rates.



BUY for attractive yields. 

  • With yield of c.9.0%, one of the highest in the S-REIT universe, we believe that negatives are priced in and SBREIT remains an attractive laggard play among peers. 
  • Its quality portfolio of business parks and hi-tech factories, coupled with a long WALE of 4.6 years, should weather the REIT through the current soft operating climate. 
  • Our TP is adjusted downwards to S$0.79 to account for increased vacancy assumptions in its portfolio.


Acquisitions to drive earnings as portfolio undergoes tenant churn. 

  • The Manager is proposing to acquire Bukit Batok Connection from the sponsor Soilbuild Group for S$96.3m, and expects to complete the deal in 3Q16 after approval from unitholders in an EGM. Acquired at an NPI yield of 8.3% (8.0% on total acquisition cost) and a lease-back to the sponsor for seven years, the deal is accretive to earnings. 
  • Assuming that SBREIT intends to maintain its current gearing of 36%, up to S$55m of new equity or about 8% of its market share will need to be raised. The acquisition will come timely just when the manager is seeing increased operational headwinds from rental reversions.


Conservative capital management shields SBREIT substantially from rate hikes in the immediate term. 

  • The Manager lengthened the debt expiry profile to 3.4 years with an all-in cost of debt of 3.44% in 2Q16, and has hedged close to 100% into fixed rates. This provides a buffer against any interest rate uncertainty in the medium term.


Valuation:

  • We have a DCF-backed TP of S$0.79, supported by an attractive yield of c.9.0%. 
  • Maintain BUY.


Key Risks to Our View:

  • Interest rate risks. Rise in interest rates in the medium term will have a negative impact on distributions but the Manager has substantially hedged out these risks with a high percentage of fixed-rate borrowings. 




Derek Tan DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-07-14
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.79 Same 0.84


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