Viva Industrial Trust (VIV SP) - Maybank Kim Eng 2017-05-02: A Strong Start

VIVA INDUSTRIAL TRUST T8B.SI

Viva Industrial Trust (VIV SP) - A Strong Start

Viva delivered strong operating results during 1Q17, with DPU at +13.2% YoY/+5.3% QoQ, achieving 28% of our full-year estimate.
We continue to see Viva’s growth outlook as positively skewed towards its two large business park assets, on the back of affirmative rental reversion and post-AEI gains.

We have lowered our FY18 estimates to factor in vacancy risks at its Jackson Square property, but maintain BUY given the 8% dividend yield support plus 14% share price upside to our new DDM-based SGD0.93 TP.

Viva reported strong 1Q17 results with double-digit % YoY increases in revenue, NPI and distributable income. DPU at SG1.85cts met 28% of our full-year estimate.
The performance was attributed to the acquisition of 6 Chin Bee Avenue (completed in Jan 2017), rental uplifts at 30 Pioneer Road, and ramping up of retail space at VBP, with committed occupancy improving QoQ from 94.9% to 95.6%.
Viva’s portfolio occupancy further improved QoQ from 89.0% to 91.1%.

Viva received a liquidation notice from Jackson International Pte Ltd (JIPL), the facilities manager of its Jackson Square (JS) property acquired in Nov 2014.
JPIL had committed to providing rental support until Nov 2019 as part of the purchase agreement, which will now be ineffective.
With Viva, however, entitled to a SGD3.9m bank guarantee support, we see limited impact to FY17 DPU estimates. Viva is seeking legal advice on its next course of action, and will share further updates when available.

We revised forecasts to factor in higher vacancies at JS in FY18E. We believe our estimates are conservative because they assume a potential exit of the JPIL subsidiary tenants at 24% of the NLA (19% of gross rental income) following the liquidation process, even though they have not filed for liquidation nor defaulted on their rental payments.
While our DDM-based TP is lowered to SGD0.93, we see 8% dividend yield as supportive. Maintain BUY.

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

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/ 2017-05-02

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.93 Down 0.950