Mapletree Logistics Trust (MLT SP) - Maybank Kim Eng 2017-07-25: Stabilising Conversions, Overseas Recovery

MAPLETREE LOGISTICS TRUST M44U.SI

Mapletree Logistics Trust (MLT SP) - Stabilising Conversions, Overseas Recovery

MLT reported 1Q18 DPU of SGD1.89cts, up 2.0% YoY and 1.5% QoQ, driven by stabilising asset conversions in Singapore, a stronger performance in Hong Kong (revenue/NPI up 5.7%/6.1% YoY) and contributions from FY17 acquisitions, which helped mitigate transitional downtime at a S. Korean property.

We have revised our estimates to factor in stabilising NPI margins and recent divestments in Japan. Acquisitions should continue to drive longer-term upside for MLT, while potential interest savings from a perpetual refinancing initiative could add 1-2% upside to our FY18-20E DPU forecasts.
For now, we maintain HOLD and our SGD1.20 Target Price, and prefer AREIT (BUY, TP SGD2.90) for its business parks exposure.

The improved performance in 1Q18 was led by Singapore and Hong Kong – the former has witnessed a stabilisation in its converted single-user assets (SUAs) – and accretive acquisitions completed during FYMar-17 in Australia, Malaysia, and Vietnam. These partly offset a weakness in S.Korea, from an SUA-to-multi-tenanted building (MTB) conversion, which pulled down portfolio occupancy to 95.5% (from 96.3% in 4Q17).
MLT achieved +6% rental reversion, mainly driven by its assets in Hong Kong (+7%), China (+15%), Japan (+4%) and Vietnam (+4%), with management seeing improving demand in Hong Kong, Vietnam and Australia.

Aggregate leverage rose QoQ to 39.0% (from 38.5%) with borrowing cost stable at 2.3%. MLT has refinanced all of its FY18 debt requirements with SGD106m in foreign currency loans extended by 5.75 years, and hedged 79% of its total debt into fixed rates and 70% of FY18 income into SGD.
Management is seeing healthy enquiries for the redevelopment project at 76 Pioneer Road, which is targeted for completion in 3Q18.
Meanwhile, the SGD2.9m gains from divestment proceeds in Japan are expected to be distributed over six quarters from 2Q18.
Acquisitions should stay in focus for MLT, with management continuing to eye third-party assets in Australia and S. Korea, and from its sponsor in Hong Kong.

We fine-tuned our estimates, and expect NPI margins to stabilise during FY18-19E, even as our forecasts have stayed largely intact.
We see scope for MLT to realise interest savings from refinancing of its SGD350m perpetual securities as it approaches the first call date in Sep 2017. By our estimates, a 1% decline in the 5.375% coupon implies SGD3.5m in cost savings, and a 1-2% upside to our FY18-20E DPU forecasts. HOLD.

Earlier-than-expected pick-up in leasing demand for logistics space driving improvement in occupancy.
Better-than-anticipated rental reversion trend.
Accretive acquisitions.

Prolonged slowdown in economic activity could reduce demand for logistics space, resulting in lower occupancy and rental rates.
Termination of long-term leases contributing to weaker portfolio tenant retention rate.
Significant volatility in AUD, JPY, MYR, and KRW could impede hedging efforts and impact DPU estimates.
Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.

Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-07-25

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.200 Same 1.200