Mapletree Logistics Trust - DBS Research 2018-06-25: Doubling Down On China

MAPLETREE LOGISTICS TRUST SGX: M44U

Mapletree Logistics Trust - Doubling Down On China

DPU-accretive acquisition of 11 Grade A modern logistics warehouses in China.
Growing exposure to e-commerce tenants; ability to cross-sell opportunities as demand grows.
4Q18 results ahead of expectations.
Target Price raised to S$1.48; maintain BUY.

Mapletree Logistics Trust (MLT) is on a roll and back on the acquisition path. Post recent plans to acquire a portfolio of modern logistics properties, we remain excited on MLT’s growth prospects.

Coupled with a stronger balance sheet post recapitalisation, improving organic growth outlook and a myriad of acquisitions, we believe that the REIT’s improved earnings prospects will translate into higher valuations going forward.
Our Target Price is raised to S$1.48 to account for new acquisitions. BUY!

Our Target Price of S$1.48 is above consensus average of S$1.35. We believe that the street has not accounted for the improved fundamentals post acquisition and potential to surprise on the upside organically and through acquisitions.
In addition, MLT's portfolio mix is tilted towards more developed markets (SG, Japan, HK and Australia) which contribute c.76% of portfolio net property income. 4Q18 results were slightly ahead with organic growth outlook remaining positive for key markets.
More acquisitions in the pipeline. We see MLT gearing up more going into 2019. Potential acquisitions from third parties and markets like Vietnam and Australia are potential opportunities that could be executed upon in the medium term. We have priced in S$200m of acquisitions in our estimates, funded by debt.

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 into positive adjustments to our earnings estimates.

MLT recently acquired a 50% interest in 11 Hong Kong special purpose vehicles (HK SPVs) which hold 11 new Grade A logistics properties across China, the majority of which are located within the Eastern and Mid-West regions. The acquisition cost is RMB1,021.6m (S$212.8m), inclusive of acquisition-related cost. The agreed property value for the underlying properties on a 100% basis is RMB2,846.8m (c.S$593m) which is at a 1.7% and 3.7% discount to the appraised values of independent valuers Colliers and JLL respectively.
The properties have strong connectivity and are located in cities which are in transportation hubs (near railways, railway stations, airports or seaports). We believe these attractive property attributes will enable the properties to retain and/or attract more tenants to be located there.

The well-located new assets are backed by long land leases averaging 47 years, with high committed occupancies ranging from 88.5- 100% and strong tenant base. Leading e-commerce players such as JD.com, Cainiao (the logistics arm of Alibaba) and Sinotrans are among the Top 5 tenants.
Upon completion, based on a 50% stake, the acquisition would effectively double MLT’s net lettable space in China to 8.8m sqft and boost its e- commerce revenue exposure in China from 18% to 42%.

The implied net property income yield is estimated to be close to 6.4%, which is higher than the current property yield for its China portfolio. Based on the independent market research consultant, the properties are located in clusters with forecasted rent growth of between 2.7% and 5.1% from 2017-2018F and between 3.5% and 5.9% from 2018F-2019F. This bodes well for MLT as higher rental prospects will imply an upside when leases come due in the coming few years.
In terms of medium-term organic growth opportunities, the acquisition also gives MLT inroads to an exciting e-commerce client network. Given its ambitions to expand abroad, we believe this strategic acquisition could open new doors for MLT, setting the stage for further cross-selling and collaborative opportunities with tenants in other geographies in the future.
MLT announced an equity fund raising (EFR) and raised c.S$220m at an average price of S$1.197 per share with strong interest from investors. Post fund raising, we estimate DPU accretion to be c.0.4%, while gearing is estimated to dip slightly to 37.5%.

4Q18 gross revenues and net property income (NPI) grew by 11.4 % and 13.7 % y-o-y to S$107.5m and S$91.3m respectively. On a full-year basis, they also registered growth of 5.9% and 6.9% y-o-y to S$395.2m and S$333.8m respectively.
This was mainly due to the acquisition of MLHTY in Hong Kong and completed redevelopment of Mapletree Pioneer Logistics Hub (MPLH), and after partial offsets from the ongoing redevelopment of Ouluo Logistics in China and divestment of four properties completed over FY18.
Distributable income to unitholders (after amount distributable to Perp holders) grew by 27.1% to S$59.3m, while 4Q18 DPU expanded by a smaller quantum of 4.1% to 1.937 Scts, mainly on an expanded share base. Lower distributions to Perp holders, which fell c.42% y-o-y to S$4.2m in 4Q18 post refinancing through the issuance of new perpetuals, also helped to boost DPU.

Portfolio occupancy rate is improving and hit 96.6% (vs 96.2%) on the back of improving occupancy rates across Singapore, Korea and China. Softer occupancy rates in Hong Kong (96.6% vs 99.8% in 3Q18) reflected a larger portfolio after the acquisition of an additional 38% interest in Shatin No. 3, which is currently undergoing asset enhancement works. Excluding this, Hong Kong occupancy rates would have in fact improved to 99.9%.
Rental reversions remained positive at c.2.6% on average in FY18, arising mainly from the Hong Kong and Vietnam markets. For 4Q18, rental reversions averaged 1.6% as positive reversions of 6% in Hong Kong and 2% in Singapore were mitigated by flattish trends in China (0-0.5%).

Derek TAN DBS Vickers | Carmen TAY DBS Vickers | Mervin SONG CFA DBS Vickers | https://www.dbsvickers.com/ 2018-06-25

SGX Stock Analyst Report BUY Maintain BUY 1.48 Up 1.450