Mapletree Logistics Trust - DBS Research 2016-05-03: Headwinds to growth

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MAPLETREE LOGISTICS TRUST M44U.SI 

Mapletree Logistics Trust - Headwinds to growth

• 4Q16 DPU in line with estimates; below consensus
• Conversions of single-user to multi-tenanted properties to result in margin pressure
• Acquisition capacity dependent on ability to raise new equity given optimal gearing level

Margins to remain under pressure, downgrade to HOLD. 

• We downgrade our call to HOLD with a revised TP of S$1.10. 
• We see further margin pressure posing downside risk to estimates, if the operational environment worsens. 
• A prospective FY17- 18F yield of 6.6-6.7% is fair, in our view.

Acquisitions and developments to drive growth but limited by high gearing. 

• We are forecasting a modest decline/flattish outlook for distributions over FY17F-18F on the back of ongoing headwinds from a weakening rental outlook in Singapore, its core market, which contributes c.40% of top line. 
• A key issue for MLT has been the conversion of single-user assets to multi-tenanted buildings which typically lead to efficiency loss and higher vacancy rates. 
• Our estimates are revised by 7-10% to account for higher operating expenses from these conversion activities. 
• A key expiring master lease is KPPC in Korea at the end of 2016, which is estimated to account for c.2% of top line which is at risk in the event of a non-renewal.

Gearing is close to 40% but within management's comfortable range. 

Given ongoing capex obligations for redevelopment projects, we project gearing to stay at the c.40% level. This means that further acquisitions are likely to be partially funded from the issue of new equity, if the opportunity arises. This could cap re-rating opportunities in the near term.

Valuation:

• We downgrade our call to HOLD, with a lower TP of S$1.10, based on DCF valuation. 
• At its current price, MLT offers investors dividend yields of 6.6-6.7% for FY17-18F.

Key Risks to Our View:

• Acquisitions ramp 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 surprises to earnings estimates, and re-rate the stock higher.

Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-05-03

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