SOILBUILD REIT: "8.0% FY15 yield in sight," says AmFraser

AmFraser Research analyst: Wong Hong Wei & Wilson Liew
 

Good set of results in-line with estimates.Concluding its first full-year results, Soilbuild REIT delivered a DPU (dividend per unit) of 6.2c, 3.8% higher than that the IPO forecast. With revenue, NPI (net property income) and DPU in-line with our estimates, our fair value of S$0.95 is kept unchanged. At 8.0% FY15F yield, we find Soilbuild REIT compelling with a higher yield than most SREIT peers.

 

Headwinds mitigated by proactive lease renewal. Despite a softer industrial rental market, Soilbuild REIT reported full occupancy in 4Q14 and completed the negotiations for over 20% of renewals due in 2015. This puts Soilbuild REIT in a good position to complete more renewals, with upside risks that future results may eventually come out ahead of our estimates that are based on a conservative assumption that occupancy rates may decrease 10pp in at West Park Biz Central and Tuas Connection in FY15.

Manageable refinancing and interest rate risks. Soilbuild REIT termed out its debt profile, with approximately the same amount of debt expiring each year over 2015-2018. At the same time, 80% of total debt is hedged with interest rate swaps. With the interest rate environment remaining favourable, in the near-term we do not foresee significant increase in the cost of debt.

Potential impact from JTC proposed rent revision. Soilbuild REIT is contesting the proposed revision in land rent and subterranean rent that would increase the rent payable on Solaris by S$3.5m p.a., as the manager believes it has a strong case.

If the ruling is not favourable, our FY15-17 DPU forecast remains unchanged till 15 Aug 2018 as Solaris is under a triple net lease which passes through the land rent. However, the fall in DPU thereafter would result in the DDM-derived fair value falling to S$0.90, based on our estimates.

Maintain BUY with 8.0% FY15 yield in sight. Even after factoring conservative assumptions (fall in occupancy, increases in financing costs) which weighed on our DPU estimates in FY15-17, we estimate 29% upside (incl dividends) with a DDM-derived fair value of S$0.95. In the event that the JTC land rent on Solaris is increased, the corresponding fall in DDM-derived fair value to S$0.90 still puts Soilbuild REIT with an attractive 22% upside potential (incl dividends).