OCBC upgraded Viva Industrial Trust to Buy from Hold, calling it an attractive opportunity after it underperformed the broader index during the market rout.
The bank noted VIT is trading at 8.6 percent 2018 yield and 7.9 percent 2019 yield as of Thursday, adding “we see this as a fairly attractive entry price.”
“We believe that the underperformance has to do with investor uncertainty in anticipation of further news on the proposed merger with ESR-REIT,” OCBC said in a note on Friday, noting the deal’s exclusivity could expire at the end of March unless the two parties agree to extend it or reach a deal.
The bank said it was generally positive on the potential deal, noting the combination would make VIT the fourth largest industrial S-REIT by asset portfolio size, up from ninth currently.
“The asset diversification of the enlarged portfolio would mean that the merged entity is less affected by single instances of tenant defaults,” the bank noted, adding VIT would also have better refinancing options and higher liquidity. But it would also come at the expense of diluting the portion of the portfolio exposed to business parks down to 30 percent from the current 67 percent.
It expected that if a deal was reached between the two S-REITs, the share swap would be dividend neutral, to entice VIT unitholders to accept the offer; if a deal isn’t reached, OCBC said removing the uncertainty of the talks may still help the unit price recover.
It kept a fair value of S$0.93. The unit ended Friday at S$0.86, down 1.14 percent.