Mapletree Logistics Trust - CIMB Research 2017-08-29: What’s Not To Like

MAPLETREE LOGISTICS TRUST M44U.SI

Mapletree Logistics Trust - What’s Not To Like

We like Mapletree Logistics Trust (MLT)’s proposed acquisition of Maplestree Logistics Hub Tsing Yi on all fronts.
Entry NPI yield is 5.7% and we expect the acquisition to be accretive.
We view the acquisition price as attractive. We like HK's market fundamentals and the asset's quality, and we commend management's balance sheet recalibration.

HK will become MLT’s largest market by value; this would have implications on our blended cost of equity.
Perhaps, the only one thing which we are lukewarm on is valuations. Maintain Hold as we continue to project total returns of less than 10%.

MLT has proposed to acquire Mapletree Logistics Hub Tsing Yi, Hong Kong SAR (HK) for S$834.8m or 5.7% NPI yield. The agreed property value is at 3% and 2.4% discount to the respective independent valuations by Colliers and CBRE. We view the acquisition price as attractive, as MLT’s existing properties in HK are yielding 4.5%. Further, Colliers and CBRE have used valuation cap rates of 5.1% and 4.6%, respectively. This compares to c.4% cap rate for HK warehouses (partly a function of strata-titled warehouses).

From both demand (logistics hub, rising e-commerce activities) and supply (limited supply of modern warehouses) perspectives, we view the HK logistics market fundamentals positively. The acquisition will increase the trust's NLA in HK by more than 70% to 2.8m sq ft, and HK will become its second-largest income contributor, accounting for 27% of its NPI (up from 17% previously). The shift in geographic mix would also have implications for our blended cost of equity calculation.

Assuming an equity issuance price of S$1.15/unit, we increase our FY3/18F-20F DPU by 1.1-1.7%. We expect the acquisition to be completed in Oct 2017. The funding structure consists of
1. S$640m equity fund rising (private placement and preferential offering of new units),
2. loans of S$377.3m (assumed interest rate of 2.75%), and
3. new perpetual securities issuance of S$180m (assumed coupon rate of 4.0% p.a.).
We estimate NAV to inch up post-completion, to S$1.05/unit at end-FY18F (end-1QFY18: S$1.02/unit).

Part of the equity fund raising will be used to redeem the existing S$350m 5.375% perpetual securities callable on 19 Sep 2017.
We like that MLT has taken the opportunity to recalibrate its capital structure and has effectively enabled its balance to be more flexible.
Post the transaction, we expect gearing to improve to 38% (end-1QFY18: 39%). Including the potential divestment of 7 Tai Seng Drive, Singapore, gearing should drop to c.37.2%, in our estimate.

To be prudent, we have not factored in the divestment of 7 Tai Seng to MLT’s sponsor as the transaction is subject to JTC approval. The reason the sale consideration of S$68m is 114% above its latest valuation is because re-development potential has been priced in.
We estimate a divestment gain of S$23.1m (c.9.5% of FY19F distributions) which could be distributed back to unitholders over eight quarters (in line with usual practice).

We like MLT’s proposed acquisition of the Tsing Yi property on all fronts. We raise our DDM-based TP marginally to S$1.13. However, we maintain our Hold call on MLT as we forecast total returns of less than 10%.
Upside risk to our call is further accretive acquisitions.
Downside risk is a turn in key markets (HK, Singapore and Japan).

The Tsing Yi property is an 11-storey modern ramp-up warehouse with NLA of 148k sqm, and remaining land lease of 46 years. It is in close proximity to the Kwai Chung - Tsing Yi container terminals, and is well connected by highways to the city centre. According to Savills, it is one of the only 14 modern warehouses in Hong Kong. The property enjoys 100% committed occupancy with a weighted average lease expiry (WALE) of three years, and is leased to 12 high quality tenants including Ever Gain, adidas, HKTV and DKSH.
We understand that the average effective rent of the property is around HK$13 psf pm while rental escalation is 3-4% p.a. (in line with the market).
Other than the funding cost assumptions which we have described above, we have also penciled in NPI margin of c.89% and HK corporate tax rate of 16.5%. We assume that management fees associated with Tsing Yi property is paid in units.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-08-29

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