Mapletree Industrial Trust - DBS Research 2018-04-25: A Better Tomorrow

Mapletree Industrial Trust - DBS Vickers 2018-04-25: A Better Tomorrow MAPLETREE INDUSTRIAL TRUST SGX: ME8U

Mapletree Industrial Trust - A Better Tomorrow

  • Strong end to FY18; operational outlook is bottoming out gradually. 
  • Well-timed completion of development projects to augment a steady growth profile. 
  • Low gearing offers opportunities to acquire. 
  • BUY with raised Target Price of S$2.22. 

Maintain BUY with a Target Price of S$2.22.

  • We maintain our BUY call and raise our Target Price to S$2.22 as we roll forward valuations. 
  • We believe that Mapletree Industrial Trust (MINT) can continue to maintain current valuations given its ability to deliver steady earnings profiles, a valued trait in the REIT space. The REIT’s conservative gearing of c.33% (see-through basis) empowers it to deliver more inorganic growth surprises. 

Where we differ: Diversity is the right strategy.

  • We are firm believers of MINT’s overseas ventures. While investors have long attributed MINT’s premium valuations to its Singapore “pure-play” status, we believe that this view is changing, especially with a strong share price reaction post its recent fund raising for the acquisition of a portfolio of 14 data centres in the US. 
  • We see this as a green light from investors to execute on this diversification strategy as it re-accelerates the REIT’s growth profile. 

Strong end to FY18; preparing the ground for an even better 2019.

  • MINT ended FY18 well and has set the stage for a strong FY19F and is projected to deliver a steady growth profile on the back of well-timed contribution from its development projects over FY18-19F. 
  • Interest cost hedging is at a high of 85.1%, mitigating the impact from higher interest costs on distributions. 
  • We trimmed our numbers slightly to account for more modest earnings growth estimates. 


  • MINT’s resilience is a value trait in this market but this has yet to be reflected in its current share price. 
  • We maintain our BUY call and raise our Target Price to S$2.22 based on DCF. 

Key Risks to Our View: 

  • Rising interest rates. An increase in refinancing rates will be negative to distributions. However, we note that MINT has minimised this risk by hedging c.74% of its borrowings into fixed rates. 

WHAT’S NEW -Brighter days ahead

FY18 results in line:

  • MINT reported a 6.7% and 8.1% rise in revenues and net property income (NPI) to S$363.2m and S$277.6m respectively. This was mainly due to higher contribution from HP built-to-suit project coupled with pre- termination sum from Johnson & Johnson, Pte Ltd. These partially offset the lower portfolio occupancy rates in Singapore (89.6% vs 90.1% a quarter ago). 
  • Expenses increased by 2.3% largely due to higher property taxes and marketing commission.
  • Amount available for distribution for FY18 was S$215.8m, a 5.3% rise y-o-y translating into a 3.2% y-o-y rise in DPU of 11.75 Scts.

Stable quarterly results.

  • On a q-o-q basis, we note that top line is 1.2% lower y-o-y mainly due to a dip in portfolio occupancy rates and negative rental reversions. However, distributable income rose by 3.8% q-o-q mainly from the full-quarter contribution of its recently purchased 14 data centres in the US, which was accounted for under the associate line.

NAV rose by 3.5% to S$1.47 per unit.

  • This was mainly due to higher valuations across its Singapore properties (fair value gain of S$65.5m and capitalised cost of S$111.8m) and a slight uptick in valuations for its US data centre portfolio. As a result, gearing has dipped slightly to 33.1% on a see-through basis.

Operational outlook still challenging but should start bottoming out by end-2018.

  • The manager continues to see near-term challenges as tenants are still looking to right-size real estate needs and competition remains high in the near term. Rental reversions are still expected to remain under pressure in the coming quarters but should bottom out from the end of 2018 as supply risk taper. 
  • The REIT has close to 18% of its income up for renewal in FY19F and we project rental reversion rates to remain flattish or still with a negative bias.

HGST to downsize its space requirements.

  • The manager has managed to secured 23% of the space vacated by Johnson & Johnson at The Strategy. 
  • We note that one of the top tenants HGST (c1.1% of revenues) has indicated its intention to downsize at Kaki Bukit Property. As HGST takes up a significant portion of the space at the property, this will empower the manager with the opportunity to reposition the property or for a potential redevelopment.

Our estimates:

Earnings estimates adjusted downwards.

  • We have dropped our rental reversions and occupancy assumptions to account for the potential shadow space in the portfolio (i.e. HGST vacating). Our earnings estimates are thus reduced by 3%.
  • Target price is raised to S$2.22 as we roll forward our valuations to FY19F. 
  • Given attractive total returns of > 15%, we maintain our BUY call.

Derek TAN DBS Vickers | Carmen TAY DBS Vickers | Melvin SONG CFA DBS Vickers | 2018-04-25
SGX Stock Analyst Report BUY Maintain BUY 2.22 Up 2.150