Soilbuild REIT - OCBC Investment 2019-07-19: Lacking A Positive Catalyst, For Now 


Soilbuild REIT - Lacking A Positive Catalyst, For Now 

  • Soilbuild REIT's 2Q19 DPU down 6.7% y-o-y.
  • Keeping our assumptions for NKI.
  • Trading at 7.8% FY19F yield as at 18 Jul.

Soft set of results

  • SOILBUILD BUSINESS SPACE REIT (SGX:SV3U)'s 2Q19 results were below expectations. Quarterly gross revenue and net property income increased by 19.4% and 12.8% y-o-y respectively mainly due to the conversion of Solaris into a multi-tenanted property and contribution from two Australia properties, partially offset by lower contribution from Eightrium and 39 Senoko Way.
  • Soilbuild REIT's 2Q19 DPU fell 6.7% y-o-y to 1.179 S cents due to the lower occupancy in Eightrium and the depletion of the security deposit from the previous master lessee of 39 Senoko Way. 2Q19 DPU came up to 23.8% of our initial full-year forecast with 1H19 DPU coming up to 48.0% of our initial full-year forecast.
  • Rental reversions came in at -2.0% for renewals and -6.9% for new leases.

On NK Ingredients

  • Regarding NK Ingredients (NKI), the Soilbuild REIT's Manager earlier announced that the tenant has defaulted on its July 2019 rent. The Manager is in discussion with the creditor who had filed for the appointment of a Judicial Manager and is engaging prospective end-users.
  • Note that our previous (and current) assumption is that there will be a three month gap between NKI’s default and the start of a replacement lease with another tenant. Alternatively, we believe the management could choose to market the asset for sale or even potentially redevelop it to other specifications. We keep our assumption for now and will adjust our assumptions accordingly as updates are provided.

Valuation not yet compelling

  • As at 18 Jul’s close, Soilbuild REIT is trading at 7.8% FY19F dividend yield. According to Bloomberg consensus, Soilbuild REIT is trading slightly below its 10Y average in terms of blended forward dividend yield.
  • Valuations are undemanding as we note that other REITs are trading at relatively tighter yields in comparison to their own historical average. However, at this point, we are still looking for a clearer positive catalyst for the stock which could come in the form of a new tenant for the NKI property.
  • Our risk-free rate decreases from 2.3% to 2.0%. After adjustments, our fair value decreases to S$0.60. As such, we maintain HOLD on Soilbuild REIT.

Chu Peng OCBC Investment Research | 2019-07-19
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.60 DOWN 0.620