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.

Sabana – Lim & Tan

Sabana Shariah Compliant REIT ($1.04, down 4 cents) 1Q’14 distribution per unit declined 22% yoy to 1.88 cents, coming in below expectations.

The weaker than expected DPU refl ects the lower net property income as their Lorong Chuan property was converted into a multitenanted lease arrangement and straight-lining adjustments on rental income for a major tenant given rent-free period in 1Q’14.

Net profi t fell 29% yoy in 1Q’14 to $9.4mln due to lower property income, higher property tax, land rent, maintenance and lease admin expenses, as well as 39% increase in fi nance costs due to an early re-fi nancing exercise in 1Q’14.

If not for new contributions from 508 Chai Chee Lane which was acquired in Sept’13, performance would have been even weaker.

Looking ahead, management will continue to intensify their marketing and leasing efforts to improve their portfolio occupancy and also look for opportunities to recycle their capital by divesting underperforming assets and use the sale proceeds to re-invest in new acquisitions, pare down debt and distribute capital gains from divestments.

According to DTZ research, rents for conventional industrial space was held up on the back of expansion in the manufacturing sector, although that may face supply side pressures going forward.

Capital values were stagnant for the 3rd consecutive quarter due to cooling measures having been implemented (sellers stamp duty and total debt servicing ratio).

Annualizing Sabana’s latest DPU would translate to a forward yield of 7.2%. This would put it on par with much stronger peer such as Mapletree Industrial Trust’s (MIT) 7.1%. We prefer MIT given its expected 11% DPU growth in 2014 (against Sabana’s 22% declined) as well as stronger parentage and tenant base.