Mapletree Logistics Trust (MLT) - UOB Kay Hian 2017-10-25: 2QFY18 Results Of MLT In Line

MAPLETREE LOGISTICS TRUST M44U.SI

Mapletree Logistics Trust (MLT) - 2QFY18 Results Of MLT In Line

While the growth outlook for Mapletree Logistics Trust (MLT) in Singapore remains tepid, the acquisition of Mapletree Logistics Hub Tsing Yi in Hong Kong will increase diversification, lend stability and drive earnings forward.
We maintain BUY with a higher target price of S$1.37 (from S$1.29).

Results in line; maintain BUY with a higher target price of S$1.37 (from S$1.29), based on DDM (required rate of return: 6.7%, terminal growth: 2%).
This mainly factors in DPU accretion from the Tsing Yi acquisition and the 0.3% increase in terminal growth rate on better growth prospects.

The quarter saw gross revenue and NPI increase by 2.3% yoy and 2.5% yoy respectively, due to acquisitions completed last year but this was partially offset by non-contribution from three divested properties and one block in Ouluo Logistics Centre (redevelopment).
The 1HFY18 results were in line with expectations, forming 51.6% of our full-year DPU estimate.

Australia and Vietnam saw an improvement to full occupancy (100%). Occupancies in Singapore, South Korea and China improved marginally, while the remaining countries maintained their occupancy levels.
2QFY18 portfolio rental reversions came in at +1.4% due to performances in Hong Kong (+3%), China (+2%) and Singapore (+0.4%). The remaining countries had no leases due in the quarter.

Acquisition of Mapletree Logistics Hub Tsing Yi in Hong Kong for a purchase consideration of HK$4.8b (S$834.8m) by its parent, Mapletree Investments, strengthens MLT’s competitive positioning in Hong Kong - a key growth market.
The property has 100% committed occupancy, with WALE of 3 years (by NLA) with 12 high-quality and reputable tenants, including Ever Gain, Adidas, HKTV and DKSH. With an NPI yield of 5.7%, management expects the acquisition to be yield accretive (1.7% - 2.2% accretion).

When the Tsing Yi acquisition is completed, MLT will:
1. see increased exposure to faster growth markets in Hong Kong - away from slower markets (like Singapore and Japan),
2. shift its proportion of Multi-Tenanted Buildings (MTB) leases from the current 59% to 64%, and
3. diversify its revenue base (by adding three new customers to its top 10 list).
With the addition of Tsing Yi to its portfolio, Hong Kong will overtake Singapore as MLT’s largest market by asset value (although Singapore will still be its largest contributor in NPI and income terms).
Management also expects gearing to rise from the current 33.7%, to 38% post acquisition.

Proactive leasing efforts result in well-spread-out lease expiry profile, with 9.4% and 23.1% of total leases by NLA expiring in FY18 and FY19, respectively. Single user asset (SUA) leases account for 1.8% and 3.8% of leases due in FY18 and FY19, respectively.
MLT engages its tenants early in the process to secure renewals and replacements. For instance, out of the 12 SUAs expiring this year, six have been renewed, one replaced and one divested.

Well-diversified trade-mix with a shift towards F&B (+3%) and consumer durables (+3%) compared to three years ago. The shift in portfolio towards being more consumption-driven reflects a shift in market demand, while industrials have decreased over time.

Industrial rents continued declining across the board on qoq and yoy basis, with upper floor factory rents seeing the sharpest decline with a 5.2% drop from the previous year and 1.6% drop from the previous quarter, according to CBRE.
Despite the broad weakness, higher specification properties are enjoying improved leasing and rental rates with increased demand mostly coming from high-tech manufacturing firms (with requirements like clean rooms to support higher value added activities and R&D).

Management holds a mixed outlook, expecting Hong Kong to continue growing in the next 12-18 months with robust rental reversion ( > 5%).
Management is less upbeat on Singapore, which is likely to see rental reversions in the range of 0-2% and sometimes negative among its competitors. Although the decline in rent reversion is slowing along with strong demand (high occupancies), excess supply continues to weigh on rental rates.
As for the Japan market, management sees flat growth with no rental reversion or escalation, and expects its portfolio to be stable (having renewed some of its leases which are expiring).

Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-25

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.37 Up 1.290