Viva Industrial Trust - RHB Invest 2017-10-10: Showing Prudence Amidst Exuberance

VIVA INDUSTRIAL TRUST T8B.SI

Viva Industrial Trust - Showing Prudence Amidst Exuberance

Viva Industrial Trust (Viva)'s move to decline an offer to acquire its ROFR property shows that management is prudent in picking its assets. The key reason given for the decline was the large equity funding requirement, which would result in the acquisition being non-accretive to unit holders.
The move also addresses some of the investor concerns over its rapid growth in the past and highlights that management is not inclined to grow the REIT at any cost.

Overall, we expect Viva to deliver another strong set of 3Q17 results, backed by higher contributions from Viva Business Park (VBP) and occupancy improvement at Jackson Square (JS).
Potential upside could come from a favourable tax transparency ruling. The stock still offers an attractive forward yield of 8%.

Viva Industrial Trust (Viva) announced that it has declined an offer from Ho Lee Group Pte Ltd (HLG) for the acquisition of the Ang Mo Kio Property (AMK) at a purchase consideration of SGD300m.
The offer was made pursuant to the right of first refusal (ROFR) agreement entered into between Viva and HLG on 14 Oct 2013. HLG made the offer to Viva as it received an offer from an unrelated third party to acquire the property at the above mentioned price.
In accordance with the terms of the ROFR, the completion of any such sale would need to occur within 12 months from the date that Viva received the offer, failing which the property would again remain subject to the ROFR.

The industrial property in AMK comprises a seven-storey production block and a five-storey office block, has a gross floor area (GFA) of 1.07m sq ft, with a balance tenure of 40 years. Key tenants of the building include Seagate, Wing Tai, and Singapore Power. While the tenants are of good quality, Viva noted that the large equity fund raising required to acquire the asset would make it non-accretive to existing unit holders.
We view the move favourably and shows that the manager is careful in picking the assets to deliver growth.

Besides the AMK property, Viva has a ROFR pipeline to three industrial properties in South Korea and one in Shanghai. Management had previously indicated that it would be open to consider the assets for acquisition at the right price and time.
In Singapore, Viva has demonstrated its ability to acquire good quality third party assets and also grow via asset enhancements.
Gearing remains relatively high at 39.1% (maximum limit: 45%) and future acquisitions are expected to be funded by a combination of equity and debt.

In 1Q17, Viva submitted an application to the Inland Revenue Authority of Singapore regarding tax transparency treatment for rental support agreements. The move came on the back of an amendment in the Income Tax Act (1Q17). The amendment was to allow tax transparency treatment for rental income support payments, subject to certain conditions being met.
While the outcome is still pending, we believe there is a good chance for a favourable ruling. This could potentially save ~SGD2m in tax income for FY17F-18F, and further boost our DPU forecasts by ~3%.

The completion of asset enhancements in Viva Business Park (VBP) in July and higher occupancy in the Jackson Square (JS) building should contribute positively to 3Q17 results.
The stock still offers relatively attractive FY17F and FY18F yields of 7.8% and 8.1% respectively.
Our DDM-derived Target Price is based on CoE of 8.2% and terminal growth of 0%.
Key risks to our Target Price and assumptions are non-extension of land lease tenure for VBP, potential default by its master lessees and the Singapore economy falling into recession.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-10-10

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