• Bloomberg report on potential merger
• Placed on trading halt
• FY17 results within expectations

Potential Merger With ESR-REIT?

Viva Industrial Trust (VIT) has been placed on a trading halt after a Bloomberg report came out last Friday. The article mentioned that Warburg Pincus-backed ESR-REIT is in talks to merge with VIT to expand its Singapore industrial portfolio, with a deal to be announced “as soon as the next few weeks”.

Prior to this, there was no related announcement from VIT, though we note that the idea of a consolidation of smaller industrial REITs in Singapore has floated around the market. ESR-REIT discussed a deal with Sabana Shari-ah Compliant Industrial REIT last year, as revealed by a Reuters article in Aug 2017, though exclusive talks subsequently ended in Nov 2017.

4Q17 DPU Increased 5.5% YoY

Beyond the discussions with ESR-REIT, Viva Industrial Trust’s (VIT) FY17 results were within expectations. 4Q17 gross revenue increased 10.8% YoY to S$28.3m on the back of positive rental reversions at UE BizHub East and Viva Business Park, as well as contributions from 6 Chin Bee Avenue. 4Q17 NPI increased 14.3% to S$20.7m. 4Q17 DPU increased 5.5% to 1.857 S cents. FY17 DPU increased 7.4% to 7.472 S cents or to 98.6% of our full-year forecast. The overall portfolio achieved 2.6% positive rental reversions for FY17.

Maintain HOLD

As of 28 Jan 2018, VIT has yet to make an announcement regarding the discussions with ESR-REIT. We expect short-term sentiment on the REIT to remain buoyant on news of a potential merger. Should a merger take the form of a cash offer, shareholders could reasonably expect a premium above VIT’s current share price.

Should the merger take the place of share swap, shareholders would need to focus on the value of merged entity and consequently, on the fundamentals of ESR-REIT itself. Nonetheless, with next to no details on the terms, we are not incorporating any assumptions into our model parameters till there is more information.

After rolling our estimates forward and other adjustments, our fair value increases from S$0.90 to S$0.93. VIT enjoys a FY18F yield of 8.0% as of the closing price on 26 Jan. Subject to further announcements from VIT regarding the potential merger, we maintain HOLD on VIT

Source: OCBC Research - 29 Jan 2018