Mapletree Industrial Trust - Phillip Securities 2018-10-25: Operational Weakness

MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) | SGinvestors.io MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)

Mapletree Industrial Trust - Operational Weakness

  • 2Q19 gross revenue and DPU were within our estimates.
  • Portfolio WALE stands at 3.5 years and aggregate gearing of 35.1%.
  • Operational rental weakness was mitigated by inorganic contribution.
  • Resumption of distribution reinvestment plan (DRP) to strengthen balance sheet and fund development projects.
  • Maintain NEUTRAL; new target price of $1.99 (previous: $2.09).



The Positives


+ 30A Kallang Place achieved 75% committed occupancy;

  • .. higher than the 43.8% in the previous quarter. As a reminder, the asset enhancement initiative was recently completely and the property obtained its Temporary Occupation Permit (TOP) in February 2018.
  • Separately, the back-filling of space that was pre-terminated by Johnson & Johnson at The Strategy at International Business Park has improved to 41% from 23% in the previous quarter.



The Negatives


QoQ lower portfolio occupancy from 88.3% to 86.2%.

  • This was driven by lower occupancy at Flatted Factories (full quarter effect of HGST departure in 1Q FY18/19 from Kaki Bukit Cluster, who was the ninth largest tenant in MINT's portfolio) and Hi-Tech Buildings segments.
  • The lower occupancy for Hi-Tech Buildings was due to Mapletree Sunview 1 (completed in July, but lease started in August) and 7 Tai Seng Drive (in the process of decanting tenants to undertake upgrading works at the property).

Fourth consecutive quarter of negative rent reversion.

  • Weighted average reversion across the portfolio was -3.5%. There were no renewals for Light Industrial Buildings, and all other segments registered negative reversions. 
  • Tactical decision was made to lower rents and maintain occupancy.


Outlook

  • The outlook is mixed. We expect negative reversions to persist into 2019, weighing against organic growth. However, contributions from the US data centres JV, 30A Kallang Place and Mapletree Sunview 1 would result in higher distributable income through inorganic growth.


Maintain Neutral; New target price of $1.99 (previous $2.09)

  • Our lower target price is due to dilutive effect of the distribution reinvestment plan (DRP). To illustrate, our FY20e DPU is lower than FY19e despite the higher distributable income.
  • Valuation is not attractive as Mapletree Industrial Trust currently trades at 1.34 times trailing P/NAV. Limited upside from current price to our target price, which represents an implied 1.34 times FY19e P/NAV multiple.


Mechanism for DRP

  • The distribution reinvestment plan (DRP) offers unitholders the option to receive their distributions either in the form of Units or cash or a combination of both. This allows unitholders to acquire new units without incurring additional transaction related costs.


Rational for DRP

  • Cash retained will strengthen the balance sheet and help to finance development projects. The known development project in the pipeline is 7 Tai Seng Drive, which will be upgraded from a warehouse to a Hi-Tech Building. The property has been 100% committed, and likely to be used as a data centre.


Our assumptions for the DRP

  • The previous DRP ran for 13 quarters and was suspended after the 3Q FY15/16 distribution. Historically, the take-up rate of the DRP was ~44% annually, and almost $80mn was retained annually.
  • We currently assume ~44% take-up rate, which results in ~$94mn cash retained annually. We also assume the DRP to be for six quarters, thus retaining $146mn of cash and lowering aggregate leverage to 30.3% by the end of FY20.


Impact from DRP

  • As a result of our ~44% take-up rate, we estimate unit base to increase by an additional ~0.7% each quarter from the effect of the DRP and consequently ~2.7% per annum. 
  • Our value per unit is lowered by the DRP due to the dilutive effect.


Relative valuation

  • Mapletree Industrial Trust is trading above the peer average P/NAV multiple and at a tighter 12M-trailing yield than the peer average.





Richard LEOW CFA Phillip Securities Research | https://www.stocksbnb.com/ 2018-10-25
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.99 DOWN 2.090



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