The lately talked about IPO on Viva Energy REIT (ASX: VVR) has caught attention of many investors. While there has been a lot of speculation, the key things that crossed our minds with regard to this IPO have been listed herein below, in addition to our earlier reporting released prior to the IPO:
Stock price movements: With seemingly low risk profile and good potential for stable earnings growth and decent dividend yield, Viva Energy REIT (VVR) may look as an attractive investment opportunity for investors looking for consistent flow of income. The company debuted on ASX with a success as the stock rose post listing (up about 16%). The offer entailed $2.20 per share and the price jumped to a high of $2.52. On the other hand, VVR is now down 2.335% on August 10, 2016 while ASX advised that the group’s securities will trade on a deferred settlement basis from August 10, 2016 and normal trading is expected from August 12, 2016. The stock witnessed a collective rise of only 0.39% in the last five days.


Lease Expiry Profile (Source: Company Prospectus)

Dependence on a single tenant: VVR owns 425 service stations and is said to offer stability due to its extremely long lease periods and healthy rise in contracted rent of 3% per annum. In addition to these capabilities, the management is most likely to acquire more petrol stations to maintain its income generating capabilities at high yields. While the earnings growth is positioned to grow at a consistent rate, it also has some weaknesses. Since Viva Energy REIT has only one tenant (i.e., Viva Energy) and if Viva Energy’s business faces any problems, it is most likely to cause heightened pressure on revenue and earnings of Viva Energy REIT. Further, Viva Energy is not a public customer which may create issues regarding transparency etc. It has also been reported that Viva Energy Group will have a 40% interest in the REIT. The dependence on one tenant is thus risky compared to a typical REIT that has diversified tenant base, while we also note that Viva Energy enjoys the benefits of being linked to the brand name “Shell”.

Other risks: Experts have also highlighted that there may be long-term risks to VVR owing to gradual rise in demand for battery-driven cars, higher fuel prices and regulatory changes. The limited operating history is another challenge.

On the other hand, Viva Energy REIT forecasts to earn $155 million of revenue in FY17 (first full year of operation) with net profit coming down to about $117.6 million. Viva Energy REIT has $ 2,111.8 million of net assets as at December 2015, and $730.9 million borrowings at the establishment date. The market speculates that the low interest rate environment may positively impact growth prospects of Viva Energy REIT in a broad economic sense. Overall, there are mixed sentiments with regard to the investment scenario on this particular REIT stock.

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