SINGAPORE (Sept 13): RHB is initiating coverage of Viva Industrial Trust (VIT) at “buy” with a target price of 85 cents, noting a strong tenant profile; high exposure to the business park segment; and higher projections of earnings contributions from asset enhancement initiatives (AEI) for Viva Business Park (VBP).

VIT is an industrial REIT with a 100% Singapore-based portfolio, comprising eight properties worth a total of about $1.1 billion to date.

The trust last posted a rise in distribution per stapled security (DPS) to 1.75 cents in 2Q16, 6.8% up from 1.638 cents in the preceding quarter.

(See <a href="http://www.theedgemarkets.com.sg/sg/article/viva-industrial-trust-posts-68-rise-dps-175-cents-higher-revenue" target="_blank">Viva Industrial Trust posts 6.8% rise in DPS to 1.75 cents on higher revenue</a>)

“VIT offers attractive FY17F yields of 9.7% versus industrial REITs’ average of 7.2%,” states analyst Vijay Natarajan in a Friday report.

According to him, its forte lies in a strong tenant profile of blue-chip multinational corporations (MNCs) and government-linked companies (GLCs), with less than 1% exposure to the “troubled” oil and gas (O&G) sector.

He believes VIT offers the highest portfolio exposure to the “favourable” business park segment among its industrial Singapore-REIT peers. Its business park segment accounts for 58 and 59% of the trust’s asset value and gross revenue respectively.

VIT’s remaining light industrial, logistics and hotel businesses are under long-term master leases, adds the analyst, with rental guarantee and rental escalation clauses that provide rental stability to unit holders.

Although its NPI contributions in FY19 are likely to drop following the rental expiry of UE Biz Hub (UEBH) under its business park component, Natarajan says this will be partially offset by additional contributions from a step-up in its hotel lease income of $1.1 million, as well as from VBP.

The trust is currently in the midst of undertaking about $20 million worth of AEIs at VBP, which Natarajan expects to generate additional revenue of $11 million per annum after its completion by 4Q this year. He also foresees “spill-over benefits” to business park rents under $3 psf, compared to nearby rents of about $4 psf.

However, this would depend on VIT’s ability to achieve rental uplift after the expiry of rental support at its UEBH and Jackson Square properties  in November 2018 and 2019 respectively, warns the analyst.

“High gearing levels of 40% provides very limited debt headroom and with limited yield accretive opportunities in Singapore, management’s ability to acquire and operate good quality overseas properties remains to be proved,” says Natarajan.

As at 10:42am, units of VIT are trading 1.26% lower at 78.5 cents.

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