Mapletree Industrial Trust (MINT SP) - Maybank Kim Eng 2017-04-25: One REIT-urning To Growth

Mapletree Industrial Trust (MINT SP) - Maybank Kim Eng 2017-04-25: One REIT-urning to growth MAPLETREE INDUSTRIAL TRUST ME8U.SI

Mapletree Industrial Trust (MINT SP) - One REIT-urning to growth


Fundamentals intact, clear growth attributes 

  • MINT’s operating results for its FYMar17 period, with revenue and NPI up 4.5% YoY and 6.4% YoY respectively, continue to reinforce the resilience of its multi-tenanted Singapore-focused portfolio. 
  • Looking ahead, we see visible growth drivers from a rising hi-tech buildings contribution in supporting a 3.6% 3-year DPU CAGR. 
  • With debt headroom estimated at 30% of its market cap, then inorganic growth upside for MINT are not yet priced into our earnings and valuations. 
  • For now, with 19% total return upside to our new DDM-based TP of SGD2.05, we reiterate BUY.


4Q/FY17 results were ahead 

  • MINT reported 4Q/FY17 results which were ahead of both consensus and our estimates, with its Mar 2017 quarter revenue and NPI up 4.5% YoY and 6.4% YoY respectively. 
  • Portfolio occupancy was 93.1%, up from 92.1% in 3Q17, versus 94.6% a year ago, with rental growth at 2.1% YoY to SG1.94 psf/mth, underpinned by rising contribution from the HewlettPackard (HP) build-to-suit (BTS) Phase 1, with Phase 2 on track for completion by end Jun 2017. Management expects HP to generate atenth of gross rental income from 5.3% currently.


Strong balance sheet underscores growth optionality 

  • Aggregate leverage was 29.2% vs 29.4% at end-Dec 2016 with all-in borrowing costs at 2.7%. Hedged borrowing ratio was 74.9% from 67.0% at end-Dec 2016, with weighted average debt maturity extended to 3.5 years (from 3.2 years), following the issuance of SGD100m 7-year MTN at 3.16% coupon on 28 Mar 2017. 
  • MINT stands tall on key balance-sheet metrics, with the lowest funding cost and gearing amongst the industrial REITs. We estimate SGD1b debt headroom (about 30% of market cap) for supporting potential inorganic growth opportunities.


TP raised to SGD2.05, stay at BUY 

  • Going forward, we see MINT placing strong emphasis towards tenant retention in order to maintain occupancies across its portfolio. This could dampen rental growth prospects, but would be in line with expectations.
  • We raised our FY18-19E DPUs by 2.5%, on more optimistic NPI margin assumptions following the results, and introduced FY20 estimates.
  • Maintain BUY with a raised DDM-based SGD2.05 TP (was SGD2.00). 


Our TP of SGD2.05 is based on a DDM model. 

  • We utilize a DDM-based valuation methodology for REITs given the reliance on underlying asset cashflows as a significant return component. 
  • Key assumptions in our valuation for MINT include a risk-free rate of 2.5%, a market risk premium of 6.5% against our beta assumptions.


Swing Factors


Upside

  • Earlier-than-expected pick-up in leasing demand driving improvement in occupancy.
  • Better-than-anticipated rental reversion trend.
  • Accretive acquisitions.

Downside

  • Prolonged slowdown in economic activity could reduce demand for industrial space, resulting in lower occupancy and rental rates.
  • Termination of long-term leases contributing to weaker portfolio tenant retention rate.
  • Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.






Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-04-25
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.05 Up 2.000



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