• 58.1% of portfolio in business parks
• S$6.9m in additional NPI by FY18
• FY16F DPU yield of 9.8%

Business Park-focused REIT

Viva Industrial Trust (VIT) is a Singaporefocused REIT which primarily invests in business parks and industrial real estate assets. Its current portfolio comprises eight industrial properties with a NLA of 3.0m sq ft. The combined market valuation of VIT’s portfolio is S$1.2b, including its latest acquisition of 30 Pioneer Road in April, with the majority coming from business parks (58.1%).

While the industrial space continues to face headwinds, we note that rents for business parks have been resilient (-2.5% YoY and -1.0% QoQ in 1Q16). This is relative to other segments of industrial space (-5.1% YoY for all industrial, -7.0% YoY for multi-user factories, -3.0% YoY each for single-user factories and warehouses).

Large potential incremental NPI resulting from VBP AEI

Last year, VIT announced a S$22m asset enhancement initiative (AEI) for Viva Business Park (VBP). The AEI consisted of alteration and additions work to convert the ground-floor carpark and unutilised areas into retail and commercial space at three of the six blocks, as well as façade and amenity enhancements. We expect the incremental NPI resulting from the VBP AEI to reach S$3.2m in FY16, S$6.5m in FY17, and S$6.9m in FY18. This compares against VIT’s own projection of additional annual NPI of S$9.8m following the AEI.

Furthermore, after the removal of a hoarding which is inconveniencing access at UE Bizhub EAST (UEBH) by end-2016 and the expected completion of the downtown line by end-2017, we expect strong positive rental reversions for UEBH (Business Park) contributing to a ~5% to ~8% annual increase in UEBH’s gross rent from FY17 to FY19.

Initiate coverage on VIT with BUY

Looking ahead, we project VIT’s distributable income to increase by 27.0% in FY16 and 6.2% in FY17. DPU is expected to decrease 1.2% to 6.916 S-cents in FY16, based on the enlarged share base following the private placement and preferential offering last November. For FY17, we forecast DPU to increase 6.9% to 7.392 S-cents.

Based on yesterday’s closing price of S$0.705, VIT is currently trading at a forward FY16F DPU yield of 9.8% and a FY17F yield of 10.5% according to our forecasts. We value VIT using the dividend discount model (DDM) and derive a fair value estimate of S$0.75 (cost of equity: 9.0%; terminal growth rate: 0%).

The stock is trading at a forward P/NAV ratio of 0.89x. We initiate coverage on VIT with a BUY rating and a fair value of S$0.75.

Source: OCBC Research - 7 Jul 2016