Distribution Yield Lights Up Viva Energy

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Viva Energy REIT has a property portfolio of service stations in Australia offering fixed income growth. Ord Minnett initiates coverage of the stock.

-Long average lease expiries and fixed annual rent reviews
-Pays a sector-average 6.7% dividend yield
-Potential for growth in acquisitions
 

By Eva Brocklehurst

Viva Energy REIT ((VVR)) is considered to be a low-risk, defensive stock which is trading on multiples that are in line with its long-leased A-REIT peers. The company has a property portfolio of service stations across metropolitan and regional Australia, valued at $2.2bn, which offer fixed income growth at low management costs.

Brokers note tenant stability is supported by demand for motor vehicle fuel and convenience food. The service stations are operated by Coles Express ((WES)).

The portfolio has a 14.2-year weighted average lease expiry (WALE), with only 1.5% expiring prior to 2026, and fixed annual rent reviews at 3%. These rents are triple net, in that the tenant is responsible for all property repairs and maintenance.

East coast capitals account for 63% of the portfolio by value and 58% by income. More than 95% of the earnings are from properties with fixed annual rent reviews.

Ord Minnett initiates coverage on the stock with an Accumulate rating and $2.30 target, classing Viva Energy as a low-risk A-REIT which pays a sector-average 6.7% distribution yield. The company has guided to 2017 earnings and distributions per security of 13.2c.

The broker envisages potential for growth in convenience stores sales, further acquisitions and capitalisation rate compression.

Both Morgans (Add, $2.53 target) and Deutsche Bank (Buy, $2.72 target) have noted the successful acquisition of properties over 2017 and expect more of the same in 2018.

Deutsche Bank calculates that assuming the trust's interest cost is 3.7%, further acquisitions at the average cap rate of 6.25% should be accretive to earnings. The broker considers the stock cheap versus its peers, based on the distribution yield. Importantly, the revenue stream is locked in for the medium term.

Morgans assumes $50m in acquisitions in 2018 as well as the settlement of the $19.3m Coomera acquisition. The broker points out that the security can gyrate depending on the direction of bond rates yet the distribution yield is attractive compared with term deposit rates.

Potential catalysts include accretive acquisitions, debt refinancing and asset re-rating. The risks centre on higher interest rates, tenant default, and disruptions to petrol-based retailing.

FNArena's database has three Buy ratings for Viva Energy. The consensus target is $2.52, signalling 21.6% upside to the last share price. The distribution yield on 2017 and 2018 estimates is 6.3% and 6.8% respectively.

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