Mapletree Industrial Trust - CIMB Research 2015-12-09: Cost pressures & limited rental reversions to weigh in the near term

MAPLETREE INDUSTRIAL TRUST ME8U.SI

Mapletree Industrial Trust - Cost pressures & limited rental reversions to weigh in the near term

Gap between passing and new rent narrows, indicating limited scope for positive rental reversions in the near term.
Rising cost pressure to dampen NPI margin.
Stable operations but factory market is subdued.
New Kallang Basin AEI to provide medium-term booster
MINT is trading at a P/BV of 1.14x, on the higher end of its peers’ trading range.
We maintain our Hold recommendation.

Though all sub-segments (with the exception of business parks), recorded qoq improvement during its 2QFY16 results, we note that the gap between renewal and passing rents for flatted factories (45% of MINT’s AUM) and hi-tech buildings (24% of AUM) narrowed significantly. Hence, we deem that there is limited scope for positive rental reversions in the coming quarters.
Additionally, NPI for business parks was dragged by lower renewal rents, despite an increase in occupancy to 89% in 2QFY16.

Thanks to stringent cost management, the NPI margin in 2QFY16 came in at 73.7% vs. 72.1% in 2QFY15. However, going into 2HFY16, we anticipate continued cost pressure on property expenses (i.e. maintenance), and we expect NPI margin to be dampened.

Though flatted factories provide a stable base of operations, the outlook is subdued, in our view. Average rents for multi-user factories have dropped by 10% yoy.
We believe that rents could ease further in 4QCY15, on the back of supply. Multi-user factory space is projected to grow by 5.2% in 2016 (+4.2% in 2015).

MINT plans to develop a new 11-storey hi-tech building at an existing open car park space and undertake upgrading works on existing buildings in the Kallang Basin Cluster 4 property. This speculative build S$77m exercise would add c.317,000 sf of GFA.
On completion in 4QCY17, MINT targets to generate an 8% yield on cost for this project. This cluster is located within Kallang iPark, an upcoming industrial hub for high value-add and knowledge-based businesses.
MINT has debt headroom to undertake this exercise, with a current gearing of 29.7%.

We expect cost pressures and limited rental reversion to weigh in the nearer term, and only foresee stronger earnings growth from FY17 onwards with the completion of the Hewlett Packard BTS project.
Also, MINT is trading at a P/BV of 1.14x, on the higher end of its peers’ trading range. Hence, we maintain our Hold rating, with an unchanged DDM-based target price of S$1.66.

LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2015-12-09

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.66 Same 1.66