Mapletree Industrial Trust - OCBC Investment 2017-12-04: Paradigm Shift To Fuel Next Growth Phase

MAPLETREE INDUSTRIAL TRUST ME8U.SI

Mapletree Industrial Trust - Paradigm Shift To Fuel Next Growth Phase

We recalibrate our assumptions on Mapletree Industrial Trust (MIT) following its proposed entry into the overseas data centre market.
Besides factoring in the proposed acquisition of a portfolio of data centres in the U.S. via a joint venture (JV) with its sponsor Mapletree Investments in our forecasts, we also raise our terminal growth to 1.2% (previously 1%). However, this is partially offset by a higher cost of equity assumption of 7.8% (previously 7.5%) adopted to account for higher operational and regulatory risks in a new market.
We trim our FY18 DPU forecast by 0.5% but raise our FY19 DPU projection by 0.9%, whilst our fair value moves from S$1.92 to S$2.06.
We are supportive of management's move to broaden its footprint in the data centre industry and see it as a paradigm shift to fuel its next phase of growth. However, despite our higher fair value, we are maintaining our HOLD rating as we believe positives have been largely priced in.
Furthermore, we believe there are still headwinds facing MIT’s core portfolio of industrial assets in Singapore, such as supply pressures.

As a recap, MIT announced on 24 Oct that it had entered into a 40%-60% JV with its sponsor to acquire a portfolio of 14 data centres in the U.S.
The total cost works out to be US$754.2m (~S$1.03b), which means that MIT’s proportionate share is US$304.8m.
This portfolio of freehold properties has a high occupancy of 97.4% (as at 30 Sep 2017) and long WALE of 6.7 years, and is expected to contribute an initial NPI yield of ~6.9%.
According to market watcher Cushman & Wakefield, cap rates for data centres in the U.S. have compressed from 7.5% in 2014 to 5.5%-6% in 2017. To mitigate its risks, MIT is buying into a portfolio which is predominantly leased out on a core-and-shell basis, such that the replacement of the fit-outs and maintenance is limited for MIT. Management has also committed to hedge at least 50%-60% of cash flows from the U.S.
Research firm 451 Research has projected demand for worldwide in-sourced and out-sourced data centres to increase at a 5.3% CAGR (by net operational sq ft) between 2015 and 2020. We believe this growth would be underpinned by higher adoption of cloud services, big data requirements and proliferation of the Internet of things.

Wong Teck Ching Andy CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-12-04

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 2.06 Up 1.920