Mapletree Logistics Trust - DBS Research 2017-07-26: Stay On For The Ride

Mapletree Logistics Trust - DBS Vickers 2017-07-26: Stay On For The Ride MAPLETREE LOGISTICS TRUST M44U.SI

Mapletree Logistics Trust - Stay On For The Ride

  • 1QFY18 DPU of 1.887 scts a strong start.
  • Operational performance remains stable; vacancies stay low across major countries with significant exposure.
  • Asset-recycling strategy to optimise capital use.



Maintain BUY, TP S$1.28. 

  • Despite the recent rise in its share price, we see reasons to remain vested in Mapletree Logistics Trust (MLT) as it offers investors a diversified but rising exposure to growth in the Asia-Pacific region's logistics sector. 
  • We believe that MLT remains on a growth path, with the manager scouting for opportunities across its main markets of Singapore, Hong Kong, Korea, and Australia. 
  • BUY!


Stay on for the ride 


1Q17 DPU of 1.887scts in line 

  • Mapletree Logistics Trust (MLT) reported a strong start to FY18F, posting a 2% y-o-y growth in 1QFY18 DPU to 1.887 scts. This was mainly on the back of a 7.0% rise in revenues to S$95.8m, largely due to four acquisitions in the last financial year, coupled with organic revenue growth from their properties in Singapore and Hong Kong. This was further boosted by higher translation gains from the HKD, AUD, and KRW.
  • Higher revenues and new contributions more than compensated from the loss of income from a conversion of a property into a multi-tenanted building in Korea and AEIs at Ouluo Logistics Centre in China.
  • While property expenses increased due to an enlarged portfolio, net property income margins rose marginally by 0.4% ppt to 84.4% due to net leases from new contributions.

Operational performance 

  • Portfolio occupancy dipped slightly on-quarter to 95.5%. This came mainly on the drop of a conversion of a lease in South Korea which saw the country's occupancy rate falling to 83.3%. We however note that there has been a general improvement in occupancies across most of its major markets (Singapore, + 0.5%pt to 94.6%), China (+1.3%Pt to 96.0%), and Vietnam (99.3%, +2.9%ppt).
  • Rental reversions prospects remain mixed, with Hong Kong projected to remain positive given the lack of supply. Singapore is likely to remain under pressure in the near term, given the high number of new space completing in 2017. Leases expiring in Japan were all renewed, which is a positive.
  • Looking ahead, the REIT has over 12% of portfolio NLA with the leases expiring the remainder of FY18F, a majority of which will come from Singapore (4.0% of portfolio NLA), China (3.3%) and Malaysia (1.6%), which we believe will likely remain mixed in the immediate term.

Financial Metrics 

  • The manager remains prudent in capital management.
  • Gearing inched up marginally to 39% within the management’s comfort level. Average debt duration increased to 4.0 years, with all refinancing needs in FY18F addressed. Average interest cost remains stable at 2.3%.
  • We believe that the manager will be looking to refinance perpetual securities in Sept 2017 where MLT has the right to call back prior to the first reset date.

Asset reconstitution strategy 

  • The recent sale of two properties in Japan (completion in 2QFY18) for a total consideration of JPY13,500m (S$165.4m), 10% above purchase price and 32% over the latest valuation – at a projected 4.2% exit yield – is a signal that the manager will consistently review its portfolio and manage capital to optimise returns. Estimated gain of JPY 234m (S$2.9m) will be distributed to MLT unit-holders.
  • We are projecting a 4.0% CAGR over FY18-20F, driven mainly by acquisitions (priced in S$200m) in our estimates. With the stock trading at 1.15x P/NAV and trading at a yield of 6.3%, we believe that the manager could consider an equity fund-raising (EFR) to recapitalise and part-fund its growth initiatives.


Where we differ. 


Consensus estimates to see upside bias, DPU trend to bottom out from 2017 onwards. 

  • Another strong quarter in 1Q18 as MLT kept up the positive growth momentum from a quarter ago, with DPU up 2% y-o-y. We continue to believe that earnings is bottoming out and the Singapore warehouse sub-sector (c.38% of revenues) will be approaching a cyclical bottom by the end of 2017, when new supply will fall off significantly after that. 
  • We see brighter prospects in MLT’s major markets of Hong Kong, China and Australia, and the group is poised to reverse its downward trend in DPU seen in the past two years. 
  • Acquisitions - we have priced in S$200m (50% funded by equity) - will be a key catalyst for consensus to re-rate earnings.

Interest savings from refinancing its perpetual securities. 

  • With the first call date for its 5.375% perpetual in September 2017, we believe that MLT can refinance with a new perpetual at a lower coupon rate. Potential savings could be an upside surprise to consensus estimates. 
  • Portfolio interest rates are expected to remain stable, given a majority of loans are in JPY, for which we see lower risks of higher rates in the medium term.


Valuation

  • We maintain our BUY call and TP of S$1.28. 
  • The stock offers a total potential return of >10%.


Key Risks to Our View

  • Acquisitions ramping up faster than expected. A faster-than-projected acquisition pace or a better-than-expected outlook for the Singapore warehouse market will translate to positive adjustments to our earnings estimates.




Derek TAN DBS Vickers | Melvin SONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-07-26
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.280 Same 1.280



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