Mapletree Logistics Trust - DBS Research 2017-10-20: Taking Hong Kong By Storm!

Mapletree Logistics Trust - DBS Vickers 2017-10-20: Taking Hong Kong By Storm! MAPLETREE LOGISTICS TRUST M44U.SI

Mapletree Logistics Trust - Taking Hong Kong By Storm!

  • Pricing in the accretive acquisition of Mapletree Logistics Hub Tsing Yi.
  • Improved growth prospects as portfolio mix is tilted towards more developed countries.
  • Balance sheet strengthened post recapitalisation; gearing up from more acquisitions.
  • Raised Target Price to S$1.38.



Maintain BUY, TP raised to S$1.38. 

  • With the recent completion of Mapletree Logistics Hub Tsing Yi acquisition, we remain excited on Mapletree Logistics Trust (MLT)’s growth prospects. Coupled with a stronger balance sheet post recapitalisation, we believe that that the REIT’s improved earnings prospects will translate to higher valuations going forward. 
  • Our TP is raised to S$1.38 to account for new acquisitions. BUY! 


Where we differ: Market is not according MLT the right valuation. 

  • Our TP of S$1.38 is above consensus average of S$1.22m. 
  • We believe that the street has not accounted for the improved fundamentals post acquisition of Mapletree Logistics Hub Tsing Yi. Based on estimates, the portfolio mix is tilted towards more developed markets (SG, Japan, HK and Australia) which contribute 85% of portfolio value and 82% of portfolio net property income. These countries are facing improving rental reversionary prospects which add to MLT’s income visibility and stability. 
  • Our DPU estimates are raised by 2% to account from the recent acquisition and fund-raising exercise.


More acquisitions in the pipeline. 

  • While FY18F has been an active year for the REIT, we see MLT gearing up more going into 2H18-2019. Potential acquisitions from third parties or Sponsor in China, Vietnam and Australia are potential opportunities that could be executed upon in the medium term. Our estimates have not priced in any upside from acquisitions.


Valuation

  • We maintain our BUY call and raise our TP to S$1.38. The stock offers a total potential return of > 18%.


Key Risks to Our View

  • Acquisitions ramping 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 adjustments to our earnings estimates.


WHAT’S NEW


Acquisition of a new and highly efficient warehouse in Hong Kong. 

  • Mapletree Logistics Trust (MLT) recently announced the proposed acquisition of Mapletree Logistics Hub Tsing Yi. The property is a 11-storey modern ramp-up warehosue with direct vehicular ramp access to every floor. It is well connected to the city centre, the Hong Kong International Airport (HKIA), KwaiChung-Tsing Yi container terminals and the Mainland China boundary via major expressways.
  • The property has a NLA of 148,065 sqm and a GFA of 84,951 sqm. Mapletree Logistics Hub Tsing Yi will be the newest modern warehouse in Hong Kong where 79% of supply is > 20 years old and 12.0% is < 10 years. 
  • Growth in new supply is limited at c. 0.5% CAGR over 2017-2021, according to Savills. The lack of modern logistics warehouses therefore results in the property being able to command a premium of up to 30%, when compared to warehouse rents in Singapore.

Superior warehouse specifications. 

  • The superior specification and young age of the property further underpins the desirability of the property to prospective tenants and investors and thus tenant retention rates are likely to remain high going forward. It is understood that the property is 100% pre-committed to 12 tenants (including Ever Gain, Adidas, HKTV and DKSH) and offers tenants an efficient internal set-up and is designed for a high level of throughput on a 24/7basis. The property has a weighted average lease expiry (WALE) of 3.0 years. 

Attractive acquisition metrics. 

  • MLT acquired the property for HK$4.8bn (HK$5,248 psf GFA which is a 2.7-3.0% discount to independent valuations done by CBRE and Colliers). The proposed acquisition price of HK$4.8bn (S$834.8. Total acquisition consideration (including fees and transaction cost) is S$846.8m. 
  • Implied yield of 5.7% (non-amortised basis) or 5.1% after accounting for rent-frees given upfront). The initial yield will likely come as a positive surprise to investors when compared to recent transactions of c. 4.0% yield and the current portfolio yield of 4.5% in Hong Kong. 

Significant deal size which will improve MLT’s earnings stability. 

  • Post the proposed acquisition, HK will be the one of largest markets for MLT at c. 32% of valuation and 18% by net property income. 
  • We view this acquisition positively as the REIT will now derive a substantial portion of its income from a stable/growing market. 
  • Based on estimates, the portfolio mix is tilted towards more developed markets (SG, Japan, HK and Australia) which contribute 85% of portfolio value and 82% of portfolio net property income. These countries are facing improving rental reversionary prospects which add to MLT’s income visibility and stability. 

Recapitalised balance sheet positions the REIT to make more acquisitions going forward. 

  • The manager funded the acquisition with a combination of new equity, new debt and the issuance of new perpetual securities. MLT raised
    1. new equity of S$640m priced at a 1.7% discount to the then adjusted VWAP (53% of total funds raised) and loan facilities of S$377.3m (32% of total funds), and
    2. new perpetual securities amounting to S$180m (15% of total funds) at 4.0%, and the manager expects to see an accretion of c. 1.7% to distributions. 
  • Cost of debt is estimated at 2.75%. Post-acquisition gearing is estimated to settle at c. 37%. 
  • Our FY18F-19F estimates are raised by 2% to 7.56 Scts and 7.72 Scts respectively to reflect the latest acquisition and new issuance of units. 




Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-10-20
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.380 Up 1.280



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