Mapletree Logistics Trust (MLT SP) - Headwinds From Oversupply
Initiate at HOLD, TP SGD1.20
- MLT remains vulnerable to industrial oversupply headwinds challenging its Singapore logistics properties (38% of NPI), even as conversion risks across its portfolio are starting to abate.
- Organic fundamentals remain weak, and our expectations for its strong acquisition momentum to continue taking centre stage are contingent on management’s capital recycling efforts, given a relatively stretched balance sheet.
- Valuations could remain range-bound to our DDM-based TP of SGD1.20 in the absence of growth drivers.
Acquisition-led growth profile
- MLT’s diversification efforts since its 2005 IPO have broadened its Asian growth footprint, now spanning eight geographies and boosted assets 13- fold to SGD5.5b. The competitive landscape however remains intense, and requires a continued focus on tenant retention and asset management.
- While its Singapore portfolio faces oversupply headwinds, management has stepped hard on its inorganic growth engine, with YTD acquisitions in Australia, Malaysia and Vietnam to provide uplift to DPUs.
Conversion risks abating
- Looking forward, we expect pressure on occupancies and rental rates to remain, even as single-user asset (SUA) expiries have declined to 10.9% as at end-Dec 2016 from 14.8% a year ago.
- We see further easing of asset conversion pressures that MLT has faced in the past two years, and expect NPI margins to stabilize over FY18-19.
- We note the strong backfilling at 5B Toh Guan Road East (100% pre-committed), with overall 5.0% of NLA due for renewal in FY17 and 17.9% in FY18.
Balance sheet stretched
- MLT’s balance sheet looks stretched with gearing at 38.7%, following recently-announced acquisitions (and factoring in proceeds from a perps issue used to pare down debt), which suggest potential fundraising risk should MLT remain on the acquisition trail. We expect management to endeavour to divest its lowest-yielding assets, with proceeds used to de-gear its balance sheet.
- Earlier-than-expected pick-up in leasing demand for logistics space driving improvement in occupancy.
- Better-than-anticipated rental reversion trend.
- Accretive acquisitions.
- Prolonged slowdown in economic activity could reduce demand for logistics space, resulting in lower occupancy and rental rates.
- Termination of long-term leases contributing to weaker portfolio tenant retention rate.
- Significant volatility in AUD, JPY, MYR, and KRW could impede hedging efforts and impact DPU estimates.
- Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.