Viva Industrial Trust (VIT SP) - Maybank Kim Eng 2018-01-29: A Strong Finish… And More?

Viva Industrial Trust (VIT SP) - Maybank Kim Eng 2018-01-29: A Strong Finish… And More? VIVA INDUSTRIAL TRUST T8B.SI

Viva Industrial Trust (VIT SP) - A Strong Finish… And More?


Updated est.’s post-FY17, reiterate BUY w/Target Price +5% 

  • We updated our model post-FY17, with 4Q17 DPU at SGD1.86cts, up 5.5% y-o-y, in line with consensus but ahead of our est. 
  • Viva Industrial Trust’s key drivers – positive rental reversions at its well-located business park properties (55% of its AUM) – are expected to gain momentum, with recovering industrial sector fundamentals, and improving accessibility to its UE BizHub East asset. 
  • We believe investors are awaiting details of possible merger talks given its share suspension last Friday 26 Jan. We raised DPUs (FY17/18E up 2% each) on a stronger rental outlook and rolled forward DDM-based Target Price to FY18E (WACC: 8.0%, LTG: 1.5%). (S$1.05)
  • BUY.


Strong 4Q17 with DPU up 5.5% y-o-y 

  • Viva Industrial Trust’s 4Q17 performance, with revenue and NPI up 10.8% y-o-y and 14.3% YoY, respectively, was driven by positive rental reversions at UE BizHub East and its Viva Business Park, as well as the 6 Chin Bee Ave acquisition completed Jan 2017. 
  • The former, sited above Expo station (now an interchange), has gained from improved connectivity and accessibility following commencement of Downtown Line 3 in Oct 2017. As such, Viva recorded a +2.6% rental reversion for its portfolio in FY17.


A merger at hand? 

  • Separately, Viva Industrial Trust’s shares were suspended following its results announcement together with ESR-REIT (not rated). Bloomberg reported that ESR-REIT, backed by its sponsor E-Shang Redwood, Warburg Pincus’s Asian logistics arm, is in merger discussions with Viva Industrial Trust to expand ESR’s Singapore industrial portfolio, with terms of the potential combination likely announced the next few weeks. 
  • We had anticipated a possible consolidation theme for smaller-cap industrial REITs given the wide gap in valuations (DPUs yielding 7.1-8.2%) to large-cap peers (5.9-6.2%), as well as common substantial shareholders. 
  • We believe the primary motivation for ESR and VIT would be scale, with potential combined AUM at SGD3.0b placing it as the 4th largest industrial REIT. This could result in lower borrowing costs (smaller REITs avg. 3.4% vs. 2.3- 3.0% for larger, more liquid names). In addition, there would be a new overseas acquisition growth pipeline with E-Shang Redwood as sponsor.



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/ 2018-01-29
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.05 Up 1.000



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