VIVA INDUSTRIAL TRUST
T8B.SI
Viva Industrial Trust - Good Sets of Results as Expected, More to Come
- We maintain our BUY rating, forecast and DDM-derived TP (CoE: 8.7%, Tg: 0%) of SGD0.85. The stock offers attractive FY17F yield of 9%.
Highlights
- Viva Industrial Trust (Viva) 1Q17 DPU of 1.854 cents (+13.2% YoY) were in-line with our expectations accounting for 25.4% of our full year forecasts. The strong performance was underpinned by contributions from new acquisitions and higher contributions from of Viva Business Park (VBP) post AEIs.
- Viva completed the acquisition of 6 Chin Bee Avenue (6CB) 16 Jan 2017 which contributed SGD1.6m rental income for the quarter.
- Overall Portfolio occupancy inched up 1.3ppt QoQ to 91.1% mainly on the back of higher occupancies at VBP and UE BizHub East (UEBH).
- Viva secured ~95,000 sq ft of lease renewals/new leases in 1Q17. For 2017, it has about 11% of leases pending for renewal all of which are in VBP and UEBH for which we expect positive rent reversions of 3-7%.
- Gearing remains high at 39.2% with average borrowing cost of 3.9%. No refinancing requirements until 2018. About 80.6% of the borrowings are hedged mitigating the impact of potential rise in interest rates.
Our views
- A key near-term catalyst for the stock could be potential tax transparency treatment for rental support agreements. A favourable ruling can potentially save ~SGD2m in tax income p.a. for next 2 years i.e. a 2-3% boost to the distributable income. This comes on the back of amendment in Income Tax Act (1Q17) to allow tax transparency treatment to be accorded to rental income support payments subject to certain conditions being met.
- In accordance to above, Viva has submitted an application to the Inland Revenue Authority of Singapore. There is also a possibility that there could be write backs for some of the taxes paid in previous quarters which can further boost DPU and catalyse the stock.
- On Jackson Square (JS), we expect minimal impact to DPU from the liquidation of Jackson International Private Limited (JIPL).
- To recall, JIPL has provided a gross rental income guarantee of SGD11.6m p.a for the property till Nov 2019. In 2016 the rental topup for the property was SGD1.56m. In our model we have factored in a rental support of SGD1.0m/0.7m/0.4m for FY17/18/19F. With liquidation JIPL will no longer be able to provide the rental top-up for the property.
- Currently, JIPL's three subsidiaries occupy about 24% of the property who we believe are likely to default. Thus we expect the occupancy to dip to 60-70% levels in the next few quarters. However the impact to DPU is mitigated as
- Viva has a bankers guarantee of SGD3.87m which can be used to top-up the shortfall, and
- the buildings prime-location (walking distance to Braddell MRT) should continue to attract tenants.
- In addition, management is also currently exploring legal options to protect unitholders interest.
- AEI works at VBP are nearing completion with Phase 3 of AEIs expected to receive TOP in this quarter. Currently 95.6% of white space is committed with only 58% of it contributing. With gradual increases in contributions from the remaining white space we expect a stronger 2H17 income from VBP.
- Overall, we continue to remain positive and maintain our BUY call with unchanged TP of SGD0.85.
- Key catalysts ahead are:-
- Higher contributions from VBP and higher occupancy at business park space, and
- tax transparency for rental income support.
- Key risk is the further dip in occupancy at JS and potential loss in rental income.
Vijay Natarajan
RHB Invest
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http://www.rhbinvest.com.sg/
2017-05-02
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