SINGAPORE (Mar 23): Viva Industrial Trust (VIT) presents an attractive opportunity even if its proposed merger with ESR-REIT falls through, says OCBC lead analyst Deborah Ong in a Thursday report.
Should an agreement on the merger be reached, OCBC believes that the share swap ratio will likely be at least dividend-neutral in order to entice VIT unitholders to accept the offer.
Given that VIT is trading at 8.6% FY18 yield and 7.9% FY19 yield as of Thursday’s close, OCBC sees this as a fairly attractive entry price.
On the other hand, should the relevant parties fail to reach an agreement, OCBC expects the uncertainty associated with ongoing discussions to be alleviated, which may in turn help the unit price recover to prior levels.
Since the start of the market rout at the beginning of Feb till the Mar 22 close, VIT has clocked a total return of –7.4%, underperforming the FTSE Straits Times REIT Index by 3.7 ppt.
Ong says the underperformance has to do with investor uncertainty in anticipation of further news on the proposed merger.
Based on the initial proposal, the exclusivity is to expire on Mar 31, unless both parties agree to extend it or an agreement is reached.
Ong says the combination of VIT’s and ESR-REIT’s assets would move VIT from the 9th largest industrial S-REIT by asset portfolio size, to the 4th largest.
Firstly, the asset diversification of the enlarged portfolio would mean that the merged entity is less affected by single instances of tenant defaults and events such as VIT’s fall-off in income support.
Another benefit is the potential to refinance at lower costs, and access to a greater pool of financing options.
The third is higher liquidity as well as likely inclusion in the investible universe for more institutional funds.
Nonetheless, such advantages would come at the expense of a dilution of portfolio exposure to business parks from 67% to 30%.
"All-in-all, we remain positive on the prospect of a merger, though whether this benefits unitholders will ultimately depend on the share swap ratio," says Ong.
"Our forecasts and fair value of $0.93 remain unchanged. Upgrade VIT to 'buy' from 'hold'," says Ong.
As at 1.25pm, units in VIT are trading at 87 cents, giving it an FY18 DPU yield of 9%.
