Viva Industrial Trust - OCBC Investment 2018-03-23: Viva La Viva!

Viva Industrial Trust - OCBC Investment 2018-03-23: Viva La Viva! VIVA INDUSTRIAL TRUST T8B.SI

Viva Industrial Trust - Viva La Viva!

  • Attractive opportunity after market rout.
  • 8.6% FY18F yield as at 22 Mar.
  • Waiting for update on proposed merger.

Recent underperformance due to merger uncertainty? 

  • Since the start of the market rout at the beginning of Feb till the 22 Mar close, Viva Industrial Trust (VIT) has clocked a total return of -7.4%, underperforming the FTSE Straits Times REIT Index by 3.7 ppt. 
  • We believe that the underperformance has to do with investor uncertainty in anticipation of further news on the proposed merger with ESR-REIT. Based on the initial proposal, the exclusivity is to expire on 31 Mar 2018, unless both parties agree to extend it or an agreement is reached.

We are generally positive on the potential merger… 

  • There are a few aspects to consider. 
    • First, the combination of Viva Industrial Trust’s and ESR-REIT’s assets would move Viva Industrial Trust from the 9th largest industrial S-REIT by asset portfolio size, to the 4th largest. The asset diversification of the enlarged portfolio would mean that the merged entity is less affected by single instances of tenant defaults and events such as Viva Industrial Trust’s fall-off in income support. 
    • Another benefit is the potential to refinance at lower costs, and access to a greater pool of financing options. 
    • The third is higher liquidity as well as likely inclusion in the investible universe for more institutional funds. 
  • Nonetheless, such advantages would come at the expense of a dilution of portfolio exposure to business parks from 67% to 30%. 
  • All-in-all, we remain positive on the prospect of a merger, though whether this benefits unitholders will ultimately depend on the share swap ratio.

But even if it falls through, VIT presents an attractive opportunity 

  • Should an agreement on the merger be reached, we believe that the share swap ratio will likely be at least dividend-neutral in order to entice the Viva Industrial Trust unitholders to accept the offer. Given that Viva Industrial Trust is trading at 8.6% FY18F yield and 7.9% FY19F yield as of 22 Mar’s close, we see this as a fairly attractive entry price. 
  • On the other hand, should the relevant parties fail to reach an agreement, we expect the uncertainty associated with ongoing discussions to be alleviated, which may in turn help the unit price recover to prior levels. Our forecasts and fair value of S$0.93 remain unchanged. Upgrade Viva Industrial Trust from Hold to BUY.

Deborah Ong OCBC Investment | 2018-03-23
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