OCBC says Soilbuild REIT has undemanding valuations, but still lacks catalysts

SINGAPORE (May 31): OCBC Investment Research is maintaining “hold” on Soilbuild Business Space REIT (SB REIT) with an unchanged fair value of 62 cents as the REIT continues to await rent payment due from its master lease tenant, NK Ingredients.

To recap, the distressed lanolin manufacturer is in the midst of restructuring.

NK Ingredients was previously granted moratorium by the Singapore High Court on its proposed scheme of arrangement to creditors, under which it paid SB REIT rent owed for April-May 2019. The moratorium has since been extended for a period of eight weeks until 22 July, subject to the company’s payment of rent owed for June and July on the first day of the respective months.

In a Friday report, analyst Deborah Ong highlights the possibility of SB REIT’s management putting up the disputed property occupied by NK Ingredients for sale, or even potentially redeveloping it to other specifications, in the event that it is vacated.

“The property that NK Ingredients occupies consists of seven blocks of office, laboratory, warehouse and production facilities and associated structures… The asset is currently being used as a fully- automated lanolin, lanolin derivative and cholesterol production facility and we understand that the management has looked for potential back-up tenants including those from the same industry,” says Ong.

She currently assumes that NK Ingredients will make its rental payments for June and July, but that no subsequent extension will be granted for the ongoing moratorium.

“We then assume that the property is subsequently vacated and a replacement for the anchor tenant is found three months later. As at 30 May’s close, Soilbuild REIT is trading at 8.3% FY19F dividend yield. According to Bloomberg consensus, Soilbuild REIT is trading slightly above its 10Y average in terms of blended forward dividend yield,” continues the analyst.

According to Ong, these valuations are undemanding as other REITs are trading at relatively tight yields on a historical basis in comparison.

“However, at this point, we are still looking for a clearer positive catalyst for the stock amidst an uncertain macro environment,” she concludes.

As at 3:32pm, units in SB REIT are trading flat at 60 cents or 1 times FY19F P/NAV.