Sabana – Lim & Tan

The Board of Directors of InnoTek Limited (34 cents, down ½ cent) announced that the company is disposing its investment in Sabana Shari’ah Compliant Industrial Real Estate Investment Trust (SSREIT) which was acquired in November 2010.

Innotek had acquired the 15,000,000 units of Sabana REITs at the IPO price of S$1.05 per unit. It is the intention of management to diversify its investment portfolio into various instruments instead of solely in industrial REITs.

The 15,000,000 units in Sabana REITs would be disposed of over a period of time and a fi nancial institution has been appointed to invest the proceeds from the sale into other fi nancial instruments including dividend stocks, bonds and different sectors of REITs.

Innotek’s decision to dispose their stake in SSREIT could likely be due to the recent downbeat assessment of the industrial sector by several independent research houses as well as sell-side research reports.

It could also be due to the unexpected 22% yoy decline in SSREIT’s DPU in 1Q’14 to 1.88 cents on the back of lower occupancy, higher expenses and larger unit base post private placements in Sept’13. SSREIT’s outlook is also uncertain due to another 3 properties with master leases expiring in 4Q’14. Management also warned that supply side pressures may be faced going forward.

Looking at SSREIT’s average volume traded in the past 6 months of close to 1mln, it could take Innotek at least 15 trading days to sell off their stake in SSREIT.

This could in turn create short term pressure on SSREIT’s trading price.

Assuming Innotek raises $15mln from the sale of its stake in SSREIT, the company’s net cash position will be boosted from the current $16mln to $31mln, accounting for 37% of its market cap of $83mln.

Notwithstanding this, its fundamentals remain challenging with management warning of continuing losses in 2Q’14 due to high start up costs and initial low production volumes for several new programs in their TV business. The successful ramp up in their new TV programs will see a better performance in 2H2014.

We maintain our Neutral call on Innotek and Underweight on SSREIT.