Mapletree Industrial Trust - DBS Research 2017-04-25: Dividends Going Up.. Up.. and Up!

Mapletree Industrial Trust - DBS Vickers 2017-04-25: Dividends Going Up.. Up.. and Up! MAPLETREE INDUSTRIAL TRUST ME8U.SI

Mapletree Industrial Trust - Dividends Going Up.. Up.. and Up!

  • Robust 4Q17 results in line.
  • Steady operational metrics; completion of HP built-to-suit project a key driver to earnings.
  • Strong financial flexibility from low gearing level.



Maintain BUY, TP S$1.94. 

  • We maintain our BUY call and TP of S$1.94 on Mapletree Industrial Trust (MINT) on the back of a steady DPU growth profile of 3-4% per annum, higher than its industrial peers. 
  • The REIT offers high earnings visibility and we have confidence that the Manager has the flexibility to execute on more developments to exploit its conservative balance sheet. This implies potential upside to earnings.


4Q17 results in line. 

  • MINT reported a strong set of operational results. 
  • Revenue and net property income (NPI) rose by 4.5% and 6.4% to S$87.8m and S$65.9m respectively. The uplift was mainly driven by the completion of the development of phase one of the built-to-suit (BTS) project for Hewlett-Packard Singapore in the middle of Dec 2016. This was supported by positive rental reversions achieved for its Flatted Factories, Hi-Tech Buildings and Stackup/Ramp-up Buildings. 
  • NPI margins remain stable at c.75% as the Manager continues to hold a tight rein on cost.
  • Distributable income rose by a tad slower 2.7% to S$51.8m (DPU of 2.88 Scts,+2.5% y-o-y) due to higher interest costs.


Positive revaluations. 

  • NAV inch up 2.9% to S$1.41/unit on the back of positive revaluations and completion of HP’s BTS project (phase 1) and ongoing capex incurred at Kallang Way.
  • Cap rates were stable y-o-y and ranged between 6.5%- 7.25% (flatted factories), 6.5%-7.0% (Hi-tech buildings), 7% for Stack-up/ramp-up buildings, 6.5%-6.75% (light industrial buildings), and 6.0% (business parks).

Operational results projected to be stable. 

  • Portfolio occupancy improved by 1ppt q-o-q to 93.1%, mainly due to the contribution from HP. 
  • Overall retention rates remained stable at 68.7%. Stack-up/Ramp-up and light industrial space recorded a dip in retention rate due to tenant relocations but we understand that a substantial amount of the vacated space has been re-let or is under negotiation.
  • Rental reversions were flattish, in line with expectations.
  • Looking ahead, we expect rental reversions to remain flat but may decline, given the negative spreads between passing and market rent levels.


Low gearing and minimal interest rate risk.

  • Strong balance sheet with gearing inching lower to 29.2%, one of the lowest among the industrial REITs. Interest cost moved 10bps higher to 2.7% as the REIT rolled over interest rate hedges through the financial year. 
  • Looking ahead, MINT is substantially hedged against interest rate rises given 
    1. close to 75% of its borrowings is hedged and 
    2. there is no-rollover of interest rate hedges in FY18F. 


Developments to drive value. 

  • The completion of HP’s BTS project will continue to drive value and earnings in FY18F. The Manager is investing close to S$147m in two more developments (30A Kallang Place and data-center BTS). This presents upside to earnings when completed from 2H18 onwards.


Valuation

  • MINT’s resilience is a value trait in this market and has yet to be reflected in its current share price. 
  • We maintain our BUY call and TP S$1.94 based on DCF.


Key Risks to Our View

  • Rising interest rates. An increase in refinancing rates will be negative to distributions. However, we note that MINT has minimised this risks by having c.74% of its borrowings hedged into fixed rates.





Derek TAN DBS Vickers | Melvin SONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-04-25
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.940 Same 1.940



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