Viva Industrial Trust (VIV SP) - Maybank Kim Eng 2017-04-18: Levering Up

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VIVA INDUSTRIAL TRUST T8B.SI

Viva Industrial Trust (VIV SP) - Levering Up

Initiate at BUY, TP SGD0.95 

• Viva has executed well since its Nov 2013 IPO to deliver steady revenue and NPI growth against a sluggish industrial backdrop, with opportune equity fundraising initiatives supporting strong acquisition growth momentum. 
• With its properties backed up by long-term master leases and rental support till FY18/19, we see Viva’s growth outlook skewed towards its two large business park assets, on the back of positive rental reversion and post-AEI gains. 
• Valuations are undemanding at 8.3% div yield, and 1.5% 3-year DPU CAGR. 
• Initiate at BUY with DDM-based TP of SGD0.95 offering 19% upside, implying 27% total return.

Long-term leases reduce cyclicality 

• Earnings outlook for Viva is defensive against an industrial oversupply backdrop, with five of its nine assets backed by long-term master leases, and rental support mechanisms in place for the UE BizHub East and Jackson Square till Nov 2018 and Nov 2019 respectively.

Inorganic growth levers to drive NPI gains 

• Growth has been steady since IPO, as NLA rose at 24% 3Y CAGR from FY13-16, and occupancy improved from 70.1% to 89.8% as at end Dec- 2016. 
• Looking ahead, Viva’s growth prospects are skewed towards two large business park assets, which are expected to generate 58% of gross rental income. 
• We see DPU growth with contribution from 
  1. Viva Business Park post-AEI, 
  2. positive rental reversion at UE BizHub East as accessibility improves following completion of Downtown Line 3 works in 2H17, and 
  3. contribution from the recently acquired 6 Chin Bee Avenue logistics asset.

Limited debt headroom 

• Equity fundraising efforts have bolstered inorganic growth initiatives so far. However, with gearing at 39.4%, we see further potential equity fundraising risk should Viva remain on the acquisition trail.

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/ 2017-04-18

Maybank Kim Eng SGX Stock Analyst Report BUY Initiate BUY 0.95 Same 0.95