Mapletree Logistics Trust (MLT SP) - UOB Kay Hian 2018-01-23: 3QFY18 Downgrade To HOLD Post Strong Share Price Performance

MAPLETREE LOGISTICS TRUST M44U.SI

Mapletree Logistics Trust (MLT SP) - 3QFY18 Downgrade To HOLD Post Strong Share Price Performance

Results of Mapletree Logistics Trust (MLT) came in slightly above expectation due to better-than-expected contributions from acquisitions.
We raise our target price by 2.9% to S$1.41 as we factor in the recent acquisition of the remaining 38% of Shatin No.3 in Hong Kong.
However, we downgrade the stock to HOLD on valuation grounds post a 28% y-o-y increase MLT's share price.

Results slightly above expectations, downgrade to HOLD with raised target price of S$1.41, based on DDM (required rate of return: 6.7%, 2.0%).
Mapletree Logistics Trust (MLT) reported a 3QFY18 DPU of 1.907 S cents/share (+2.0% y-o-y, +1.0% q-o-q), bringing 9MFY18 DPU to 5.68 S cents, up 1.8% y-o-y. 9MFY18 gross revenue was up 4.0% to S$287.7m and NPI was up 4.6% to S$242.6m. The improved 3QFY18 results was due to contributions from accretive acquisitions, but partially offset by the absence of contribution from three divestments and one of two blocks under redevelopment in Ouluo Logistics Centre, China.
The results were slightly above expectations, with 9MFY18 DPU representing 77.7% of our full-year estimates.

Overall occupancy rose slightly by 0.4ppt q-o-q to reach 96.2% in 3QFY18, led by higher occupancies in Hong Kong, South Korea, and Malaysia. Others, such as Japan, Australia and Vietnam, maintained full occupancies (100%).
Although Singapore’s occupancy has dipped slightly to 93.3%, it takes into account the newly-redeveloped 76 Pioneer Road (with committed occupancy of 55%). Excluding 76 Pioneer, Singapore’s occupancy would have been at 95.1%.
3QFY18 portfolio rental reversions came in at 2%, mainly from Hong Kong and Vietnam.

The remaining interest is acquired on an “as-is-where-is” basis, building on the recent acquisition of Mapletree Logistics Hub Tsing Yi in Hong Kong. Upon full ownership, management plans to carry out enhancement works to the facade and amenities to attract higher value tenants, especially targeting those with requirements for temperature controlled logistics facilities (cold storage etc).
Management expects to stabilise the asset over the next two years, while the asset enhancement works are carried out. When stabilised, the acquisition could boost NPI by over HK$28.3m ( > 4.8% NPI yield).

Gearing increased 4.1ppt q-o-q to 37.8% in 3QFY18, as total debt outstanding increased by S$553m, mainly due to loans drawn for Mapletree Logistics Hub Tsing Yi acquisition and AEIs, and loans re-drawn which were paid last quarter in the interim using private placement proceeds prior to completion of the acquisition. Post-acquisition for the remaining 38% of Shatin No.3, gearing may rise further to 39%.

Pro-active leasing efforts resulting in well-spread out lease expiry profile with 4.2% and 22.5% of total leases by NLA expiring in FY18 and FY19 respectively. Single user asset (SUA) leases account for 0.7% and 4.1% of leases due in FY18 and FY19 respectively.

Industrial rents weakened across the board on a q-o-q and y-o-y basis, with the sharpest decline in upper floor factory rents (-4.6% y-o-y and -4.6%qoq), according to CBRE. They noted tenants relocating from older buildings to newer developments, taking advantage of the prevailing competitive rents.
Overall demand for industrial space remained sluggish, as industrialists continued to hold back on expansion due to increased use of automation and JTC's restrictions on subletting. Only certain sub-sectors like high-tech (with requirements to house assembly facilities and clean rooms) and automotive (with plans to grow regional distribution channels of automotive parts) were showing appetite for expansion.

Management continues to see sustained leasing activities across its diversified markets, although the Singapore market continues to face pressure from a high supply of warehouse space.
To improve the quality of MLT’s portfolio, management continues looking for strategic acquisitions and asset enhancement opportunities.

We tweak our forecasted DPUs by about +2%, factoring in the boost in NPI from acquisition of the remaining 38% of Shatin No.3, Hong Kong.

Downgrade to HOLD.
We raise our target price by 2% to S$1.41 as we factor in the recent acquisition of the remaining 38% of Shatin No.3 in Hong Kong. However, we downgrade the stock to HOLD on valuation grounds post a 28% y-o-y jump in share price.
Our target price is based on DDM (required rate of return: 6.7%, terminal growth: 2%).

Positive newsflow on rising industrial rentals and capital values, yield-accretive acquisitions, redevelopment or build-to-suit opportunities.
Redevelopment and asset enhancement plans for portfolio properties.

Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-23

UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 1.41 Up 1.370