RHB Research 2015-07-22: Mapletree Logistics Trust - Short Term Pain For Long Term Gain. Maintain NEUTRAL.

Short Term Pain For Long Term Gain

  • MLT booked a 2.6% YoY decline in DPU for 1QFY16, ie broadly in line with our forecasts.
  • Maintain NEUTRAL, with a lower DDM-derived SGD1.18 TP (from SGD1.24, 2% upside) in the midst of the transition and challenging market in Singapore.
  • Domestically, the company continues to be impacted by downtime at several properties that were converted to MTBs from SUAs.

 Conversion of single-user assets (SUAs) into multi-tenanted buildings (MTBs) continues to be a drag.

  • Mapletree Logistics Trust (MLT) booked 2.6% YoY lower DPU of 1.85 cents for 1QFY16 (Mar), which meets 23% of our full-year estimates.
  • Despite higher income contributions from newly-acquired assets, and strong performances from existing properties in Hong Kong (rental reversion: approximately +20%), net property income (NPI) margin has been compressed due to higher property expenses incurred during the conversion of SUAs into MTBs.
  • During this ongoing transition, we are expecting MLT’s NPI margins to be under pressure as property expenses continue to escalate.
  • Its gearing ratio remains healthy at 34.4%, providing ample debt headroom for the REIT to acquire new assets.

 So what are the ways to mitigate the downtrend during this transition?

  • During the conversion of SUAs into MTBs, we also see MLT’s occupancy rates falling to 96.6% (1QFY15: 97.6%).
  • In order to mitigate the transition, we think that it is most likely for the REIT to focus on capital recycling through the divesting of low-yielding assets and the reinvesting in higher-yielding ones.
  • We are also expecting MLT to have more sponsor injections in the future, especially from emerging markets such as Malaysia and China.

 Maintain NEUTRAL, with a lower SGD1.18 TP (from SGD1.24), which implies a dividend yield of 6.7%.

  • We are lowering our DDM-derived TP to SGD1.19 as we note that the leasing market in Singapore continues to face headwinds that could potentially affect rental and occupancy rates.
  • In addition, we take a cautious position as MLT has most of its SUA leases due in FY16 and FY17, ie 9.1% and 11.6% of its portfolio’s net lettable area (NLA) respectively.
  • We reiterate our NEUTRAL recommendation.
  • The key risk to our forecasts is lower occupancy rates for the REIT as it converts SUAs to MTBs.

(Ong Kian Lin, Ivan Looi)

Source: http://www.rhbgroup.com/