Soilbuild Business Space REIT - Phillip Securities 2017-11-09: NK Ingredients Tenancy Turns Sour

Soilbuild Business Space REIT - Phillip Securities 2017-11-09: NK Ingredients Tenancy Turns Sour SOILBUILD BUSINESS SPACE REIT SV3U.SI

Soilbuild Business Space REIT - NK Ingredients Tenancy Turns Sour

  • NK Ingredients fails to top-up insurance guarantee and Trustee has called for the balance of the guarantee.
  • Negative impact from FY18 onwards.
  • KTL Offshore could be next to default.

What Is The News?

  • The Trustee of Soilbuild Business Space REIT (SBREIT) has called for the $1.69 mn balance of the NK Ingredients insurance guarantee. 
  • The Trustee had previously called for and received $3.42 mn arising from rental arrears. The tenant then had seven days to top-up the insurance guarantee after it was drawn down on 10 October. The tenant failed to top-up after the Trustee demanded for the top-up on 16 October.

How Do We View This?

No impact to our FY17e forecast 

  • The $1.69 mn balance insurance guarantee is approximately equal to four months of rent and we estimate it to be adequate until January 2018.
  • Likely for the lease to be terminated early We believe that to be so, since the Tenant is unable to furnish an insurance guarantee.
  • The existing master lease is actually for 15 years, commencing from the acquisition date on 15 February 2013.

Significant impact to portfolio income visibility from FY18e onwards 

  • On a full year basis, NK Ingredients accounted for 8.9% of portfolio gross rental income (GRI) and 6.8% of net property income (NPI) in FY16. For the most recent 9M17, NK Ingredients contributed 5.9% of portfolio GRI. We believe that marketing of the property at 2 Pioneer Sector 1 will commence soon. 
  • Other than impact to the GRI, we expect property expenses to add to the burden for the duration it remains vacant and if the property is converted to a multi-tenancy. We currently assume the property to remain vacant for four months after January 2018. 
  • Property valuation at the end of this year could possibly be negatively impacted as well.

72 Loyang Way already dragging portfolio down; KTL Offshore could be next 

  • 72 Loyang Way is only 27.0% occupied as at 3Q17, and there is difficulty in back-filling the property. The difficulty arises from not only having to secure a tenant specifically from the Offshore Marine sector, but also requiring up to 148,500 sq ft of space.
  • Meanwhile, KTL Offshore Pte Ltd (tenant at 61 & 71 Tuas Bay Drive), which contributed 5.9%/5.1% of FY16 GRI/NPI, is now in arrears. Its parent company, KTL Global Limited was flagged by its Independent Auditor, doubting the Group's ability to continue as a going concern. More recently, the Group is also reshuffling its top management.


  • The outlook is negative due to multiple tenant defaults in the portfolio – Technics Offshore Engineering, NK Ingredients and KTL Offshore. Income visibility from NK Ingredients has been impaired, and we think there is a high possibility that KTL Offshore could be next.

Maintain Reduce; lower target price of S$0.61 (previously $0.64) 

  • No changes to our FY17e estimates, but lowered our FY18e GRI/DPU estimates by 4.4%/7.0% from previous. We would have to make further cuts to our estimates, if a default by KTL Offshore materialises. 
  • Our target price represents an implied FY17e P/NAV multiple of 0.86x.

Relative valuation 

  • SBREIT is relatively undervalued to the peer average P/NAV multiple, and has a higher yield compared to the peer average. 
  • We believe the higher yield compared to peers is a reflection of the risk of the portfolio going forward.

Richard Leow cFTE Phillip Securities | 2017-11-09
Phillip Securities SGX Stock Analyst Report REDUCE Downgrade NEUTRAL 0.61 Down 0.64