SINGAPORE (May 21): Maybank Kim Eng is downgrading its call on Viva Industrial Trust (VIT) to “hold” from “buy” previously, with a lowered target price of 96 cents.
This came on the back of the trust announcing that ESR-REIT has confirmed its acquisition of VIT for $936.7 million, which has been in discussions since end-Jan 2018.
See: Warburg Pincus-backed REIT to buy rival in Singapore's first REIT merger
In a Monday report, analyst Chua Su Tye says, “We are positive on Viva’s proposed merger with ESR-REIT as the deal would be value-accretive to unitholders.”
Apart from an immediate 8% valuation boost, the analyst sees post-merger benefits from increased liquidity likely arising from an enlarged AUM; potential interest cost savings supporting further DPU growth; and longer-term overseas growth opportunities with its new sponsor’s backing.
VIT’s share price is also expected to be range bound and capped at its 96 cents offer value until completion of the acquisition deal, in which VIT shareholders are expected to receive 96 cents per unit – 10% in cash and 90% from issuance of new ESR-REIT units.
See: Viva Industrial Trust stapled securityholders to receive 96 cents apiece in proposed merger with ESR-REIT
This price is at an 8% premium to its last close and 26% above its end-Mar 2018 NAV.
Hence, this implies 160 ESR-REIT units for every 100 VIT units, on an issue price of 54 cents per ESR-REIT unit.
ESR-REIT expects to achieve a 5.6% DPU accretion for its unitholders, with the stronger NPI contribution from VIT and lower interest cost resulting from refinancing of the latter’s $535 million debt.
Upon completion in 3Q18, VIT will be delisted and this merger will form the fourth largest industrial Singapore REIT (S-REIT) with a combined AUM of $3.0 billion.
“We see clear benefits from the deal from scale of an enlarged portfolio, increased market liquidity, and lower borrowing costs lifting DPUs over the longer term,” says Chua.
Post-merger, the analyst expects the portfolio quality of the enlarged trust to be strengthened, from the contribution of Viva’s business park assets and the AEI knowhow of its management complimenting ESR-REIT’s growing high-specs push.
And in the longer term, potential overseas opportunities will be supported by a new sponsor.
As at 11.30am, units in VIT are trading at 90 cents or 1.1 times FY18 book with a DPU yield of 7.8%.
Concurrently, units in ESR-RET are trading at 52 cents.
