• 2Q DPU at 25.3% of full-year forecast
• Stock jumped 9.2% since initiation
• FY16/17F DPU yield of 9.2%

2Q16 results within expectations

Viva Industrial Trust’s (VIT) 2Q16 results met our expectations. DPU came in 5.4% lower YoY at 1.750 S cents, making up 25.3% of our fullyear forecast at initiation. Gross revenue increased 31.3% YoY to S$23.4m and net property income increased 41.0% to S$17.2m, meeting 22.1% and 26.8% of our full-year estimates.

Revenue increased on the back of additional rental contribution from HFB, 11 Ubi Road 1, and 30 Pioneer Road, as well as additional income from Viva Business Park (VBP). Occupancy at VBP has increased from 66.6% as at 1Q16 to 70.2% as at 2Q16. Distributable income increased 28.8% YoY to S$15.1m.

Adjust assumptions for VBP and UEBH

Early results from VBP’s asset enhancement initiative (AEI) appear promising to us. The percentage of committed leases for VBP’s white space reached 68.6% as at 2Q16, with the possibility of a prospective anchor tenant who may bring commitment levels to over 90% by year-end.

With the push-back in targeted completion of AEI for Block 750B from end 3Q to 4Q, we adjust our forecasts for the incremental NPI resulting from the VBP AEI: S$2.7m in FY16 (previous forecast: S$3.2m), S$7.4m in FY17 (S$6.5m previously), and S$7.7m in FY18 (S$6.9m previously).

On the other hand, we have moderated our expectations for UEBH, forecasting gross revenue to grow by ~5% to ~6% a year from FY17 to FY20 (as opposed to ~5% to ~8%), pending more data points next year.

Downgrade to HOLD on price appreciation

Looking ahead, we project VIT’s distributable income to increase by 25.4% in FY16 and 8.4% in FY17. DPU is expected to decrease 1.8% to 6.876 S-cents in FY16, before increasing 6.9% to 7.351 S-cents in FY17. Based on yesterday’s closing price of S$0.77, VIT is currently trading at a forward FY16F DPU yield of 8.9% and a FY17F yield of 9.5% according to our forecasts.

In light of the accommodative low interest rate environment, we decrease our risk-free rate from 3.0% to 2.4% and our dividend discount model (DDM) cost of equity falls to 8.4%. Along with the assumptions tweak above, our fair value increases from S$0.75 to S$0.76.

The stock has jumped 9.2% since our initiation on 7 Jul. Based on the recent price appreciation, we downgrade to HOLD rating on a higher fair value of S$0.76.

Source: OCBC Research - 28 Jul 2016