Mapletree Industrial Trust - Maybank Kim Eng 2015-09-08: Yield to Expand.

MAPLETREE INDUSTRIAL TRUST ME8U.SI

Yield to Expand

Factoring in lower market rent assumptions for factories and business parks on weakening economy.
FY3/16-18 DPUs cut by c.1%.
TP SGD1.43, down from SGD1.77 on switch from DDM to yield target of 7.5%. D/G to HOLD.

1QFY3/16 results were strong at both the operating and financial level. Revenue, NPI and DPU were 25.6%/25.8%/26.4% of our previous estimates. Occupancy rose to 93.5% (4Q: 90.2%). Rent reversions however continued to trend down to just c.2.9% (FY3/15: 9.6%, FY3/14: 26.4%).

Recent macro data also suggests that economic risks are rising. As such, we have become more pessimistic on the leasing market going forward.
Factoring in new 2015-17 market rent assumptions of -1.4%/-2%/0% for factories, and 0%/0%/3% for business parks, causes us to expect that factory rent reversions will trend toward negative 2-3.4% over FY3/17-18, while for business parks it could soften to c.2.9%. As such, our FY3/16-18 DPUs are adjusted to 10.6/10.7/11.8 cts from 10.3/10.8/12.3 cts.
Growth is still expected with BTS projects Equinix and Hewlett Packard to contribute.

We are changing our valuation methodology across all our REITs from DDM to yield targets to better reflect the current de-rating environment. Our target yield for MIT is 7.5% vs 7.25% for Areit and 9% for Cache.
MIT has been the 2nd most resilient SREIT YTD with 8.8% total return.Its yield spread with Areit has also been declining, narrowing sharply to just 14bp, even lower than its 1- mth MA of 54bp. We do not think that it can maintain such a tight spread with Areit given the latter’s larger and more diversified portfolio, and believe a 25bp spread is more sustainable.
Applying our 7.25% target yield to our FY16 DPU lowers our TP to SGD1.43 from SGD1.77. D/G to HOLD.

Joshua Tan | http://www.maybank-ke.com.sg/ Maybank KE 2015-09-08

HOLD Downgrade BUY 1.43 Down 1.77