Mapletree Industrial Trust - OCBC Investment 2016-11-24: Underperformance unwarranted; upgrade to BUY

Mapletree Industrial Trust - OCBC Investment 2016-11-24: Underperformance unwarranted; upgrade to BUY MAPLETREE INDUSTRIAL TRUST ME8U.SI

Mapletree Industrial Trust - Underperformance unwarranted; upgrade to BUY

  • Robust DPU growth expected in FY18.
  • Low gearing ratio of 29.0%.
  • Buy on dips.

Strong track record despite challenging macro environment 

  • We believe Mapletree Industrial Trust (MIT) has established an enviable track record within the industrial REITs space. 
  • Despite headwinds facing the sector such as oversupply concerns and subdued macroeconomic conditions, MIT has continued to deliver positive DPU growth to its unitholders, with a CAGR of 7.3% from FY12- FY16. We opine this is underpinned by management’s solid execution capabilities and well-timed build-to-suit (BTS) projects for major industry players (e.g. Equinix, HP). This enhances the reputation of MIT and also the visibility of its income streams given the longterm nature of leases for BTS projects. 
  • While negative rental reversions for renewal leases have been recorded for some segments in the last 2-3 quarters, overall portfolio performance has remained largely resilient. 
  • Looking ahead, we believe MIT also offers one of the highest DPU growth within our S-REITs coverage.
  • Although we forecast FY17 (FYE 31 Mar) DPU to increase slightly by 1.3%, growth for FY18 is projected to come in at a robust 6.3%. This would be largely driven by contribution from the HP BTS facility.

Healthy financial position 

  • Besides MIT’s relatively resilient portfolio, we also like MIT for its healthy financial position. Its aggregate leverage of 29.0% (as at 30 Sep 2016) is one of the lowest amongst the S-REITs universe. This leaves it with ample debt headroom (S$674.8m before reaching 40%) to fund inorganic growth opportunities and major AEI projects. 68.6% of its debt has also been hedged for a weighted average term of 3.7 years.

Upgrade to BUY 

  • MIT’s share price has fallen 7.4% since Donald Trump’s surprise victory in the U.S. presidential elections, underperforming the FTSE ST REIT Index (-3.8%). We believe this underperformance is unwarranted given MIT’s quality attributes. It is now trading at a blended forward FY17/18F distribution yield of 7.4%, which is 1.2 standard deviations above its 5-year mean of 7.0%. 
  • With valuations looking more attractive, we upgrade MIT to BUY from ‘Hold’, with an unchanged fair value estimate of S$1.67. This translates into potential total returns of ~14%. 
  • Key risks to our forecasts and fair value include higher-than-expected finance costs when

Wong Teck Ching Andy CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-11-24
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