VIT – CIMB

Maiden DPU contribution

VIT’s 4QFY13 DPU (4 Nov-31 Dec) was broadly in line with management and our forecasts. We tweak our FY15-16 DPU forecasts but our DDM-based target price (discounted at 9.1%) remains unchanged. We maintain our Add rating as VIT’s FY14 yield remains attractive at 8.7% against its peers’ average of 7.8%. Potential share price catalysts include surprise in earnings delivery and execution.

Results highlight

VIT’s 4QFY13 DPU (4 Nov-31 Dec) was in line with expectation, at 30% of our half-year forecast. Operationally, we are seeing improvements in UE BizHub East (UEBH) as its business park occupancy improved from 64% at IPO to 84% as at end-2013. Occupancy at Technopark@Chai Chee (TPCC) remains unchanged at c.61%. We estimate operational NPI yield to be around 5.2%.

2014 to remain stable

Leases for about 21% of its underlying rental income, mostly within TPCC, is set to expire in FY14. We expect TPCC to garner a high retention rate but minimal rental reversion in 2014, given the sticky tenants but older asset. Any additional growth in VIT’s underlying rental income should come from UEBH as it leases out the remaining 16% of space. The impact on DPUs, however, should be minimal as both buildings are under rental support.

TPCC AEIs in the planning

VIT is planning an AEI for TPCC, subject to further feasibility studies, tenant commitments, and regulatory and Board approval. Recall that around 15% of the GFA (229,000 sq ft) has been zoned by HDB as “white” space and is not currently utilised. The AEI is likely to involve the conversion of the existing carpark and ground floor units into “white” space to accommodate F&B and hypermarts. Demand for such facilities is supported by the existing tenants and the densely-populated neighbourhood. We expect disruptions to the overall occupancies to be minimal as the affected areas are carparks, and selected ground floor tenants will be moving to other units currently unoccupied. Risks to the AEI are incremental gearing (currently at 38.8%) and the short remaining lease for TPCC (17 years). The AEI should be completed in 1-2 years. We have yet to factor this into our model as we await further details.