Viva Industrial Trust - Maybank Kim Eng 2018-05-16: Ready To Look Ahead

Viva Industrial Trust - Maybank Kim Eng 2018-05-16: Ready To Look Ahead VIVA INDUSTRIAL TRUST SGX: T8B

Viva Industrial Trust - Ready To Look Ahead


Results in line, maintain forecasts and Target Price

  • Viva Industrial Trust’s 1Q18 results were in line, with the stronger revenue and NPI supporting our thesis - its business park focused assets and ‘new economy’ growth drivers remain intact. Our forecasts are thus left unchanged. 
  • Despite these improving fundamentals, the recent Viva Industrial Trust's share price weakness suggests investors are awaiting the details and outcome of its discussions with ESR-REIT (SGD0.54, not rated) to potentially merge. We believe discussions are at an advanced stage based on market reports (BBG). 
  • Meanwhile, 7.8% DPU yield should lend support to our DDM-based Target Price of SGD1.05 (WACC: 8.0%, LTG: 1.5%). BUY.



Revenue and NPI growth, +2.6% rental reversion

  • Revenue and NPI increased y-o-y and q-o-q on stronger occupancies; as 10% of expiring leases in 2018 renewed helped Viva achieve a +2.6% portfolio rental reversion. 
  • The slight DPU dip was due to an all-cash payment for management fees, which were partially offset by the release of all previously retained distributable income (of SGD1.78m) arising from the Jackson Square rental support settlement.


Organic growth drivers intact

  • Viva’s core business park and high-specs light industrial assets continued to gain fresh tenancies from ‘new economy’ businesses, including the commitment by a new digital technology tenant to lease an entire floor at Viva Business Park (Block E). 
  • As of 1Q18, 41% of Viva’s 157 tenants operate in the IT, e-business or data centre sectors. Meanwhile, the completion of a vehicular link connecting 30 Pioneer Road to the adjoining property at 39 Benoi Road has resulted in improved all-level access following the former’s conversion into a ramp-up logistics facility.


Merger talks with ESR-REIT at advanced stage

  • Viva on 28 Jan 2018 received a non-binding merger proposal from ESR REIT. The exclusive discussions are still on-going and the timeline has been extended again by two weeks till the end of May. 
  • Bloomberg reported on 28 Apr both parties have reached an agreement on the key terms and are awaiting final regulatory approvals. 
  • We continue to see benefits from a consolidation with scale potentially lowering borrowing costs, and for Viva it will gain an 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 | https://www.maybank-ke.com.sg/ 2018-05-16
SGX Stock Analyst Report BUY Maintain BUY 1.050 Same 1.050



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