Mapletree Logistics Trust - UOB Kay Hian 2019-01-11: Focus On Domestic Consumption Mitigates Impact From Trade Conflict

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MAPLETREE LOGISTICS TRUST (SGX:M44U)

Mapletree Logistics Trust - Focus On Domestic Consumption Mitigates Impact From Trade Conflict

• With high exposure to domestic consumption at 80%, Mapletree Logistics Trust has mitigated uncertainties surrounding the US-China trade tension.
• Hong Kong continues to be supported by tight occupancies, while Singapore is seeing stabilisation as supply tapers from 2019-21. China has leveraged on domestic consumption growth of tier-2 cities, while Vietnam is seeing positive spillovers. Management continues to monitor the evolving external environment.
• Maintain HOLD. Target price: S$1.39. Entry price: S$1.26.

WHAT’S NEW

• We expect MAPLETREE LOGISTICS TRUST (SGX:M44U) to register positive rental reversion of 2-3% on a portfolio-wide basis for FY19 driven by Hong Kong, China and Vietnam:
  1. Hong Kong: Scarcity of quality logistics space. Supply of logistics space is tight in Hong Kong as there are no new warehouses coming on-stream, while logistic space is being redeveloped into commercial properties. Mapletree Logistics Trust’s Hong Kong portfolio has high occupancy of 98.6% as at Sep 18. The efficient Chek Lap Kok Airport, the busiest airport in the world in terms of air cargo traffic, also enhances Hong Kong’s status as a regional trading and logistics hub. Mapletree Logistics Trust achieved positive rental reversion of 5% for FY18 and 3.3% for 1HFY19.
  2. China: Leverage on growth in domestic consumption in tier-2 cities. Growth in domestic consumption and the shift towards e-commerce, express delivery and 3rd-party logistics are key drivers of demand for logistics space in China. Mapletree Logistics Trust has completed the acquisition of 11 logistics properties located in tier-2 cities, where domestic consumption is growing rapidly, for S$205.3m or NPI yield of 6.4% in Jun 18. It gained JD.com, Cainiao (logistics arm of Alibaba), Best Logistics, Sinotrans and China Post as tenants. Phase 1 of the redevelopment of Ouluo Logistics Centre at Pudong, Shanghai was also completed in Sep 18. Mapletree Logistics Trust achieved positive rental reversion of 3% for FY18 and 2.5% for 1HFY19.
  3. Vietnam: The next factory of the world. Demand for logistics space in Vietnam is underpinned by the strong inflow of FDI in manufacturing as well as fast rising consumption. There has been an increase in enquiries for logistics space since the trade conflict between the US and China escalated. Mapletree Logistics Trust should complete the acquisition of single-storey warehouses at Vietnam-Singapore Industrial Park 1 with a 10-year lease to Unilever for S$43m, providing initial NPI yield of 8.3%, in 4QFY19. In total, Mapletree Logistics Trust has three logistics properties located in close proximity to Ho Chi Minh City. MLT achieved positive rental reversion of 3% for FY18 and 4.4% for 1HFY19.
  4. Singapore: Cautiously optimistic. Management is cautious of short-term outlook due to the over-supply of logistics space in Singapore. A massive 10.4m sf of new warehouse space was added in 2017, representing a significant increase in supply of 10%. Supply of new warehouse space is expected to taper off during 2019-21. Rents have stabilised in 1HFY19 and management is hopeful of recovery in 2HFY19. Contribution from Singapore would be bolstered by acquisition of five ramp-up properties for S$778.3m, which was completed in Sep 18. CWT would lease back the five properties for average of 8.7 years with initial NPI yield at 6.2% and built-in rent escalation of 1.5% p.a..

Gradual expansion with support from sponsor Mapletree Investments.

• Mapletree Logistics Trust will explore opportunities to scale up in China, Japan, Malaysia and Vietnam, including acquiring logistics assets from sponsor Mapletree Investments. Mapletree Logistics Trust has right of first refusal to acquire the remaining 50% of 11 properties in tier-2 cities in China.

Capital management: Two options to replenish equity capital.

• Mapletree Logistics Trust’s aggregate leverage ratio (ALR) was 38.1% as of Sep 18. Mapletree Logistics Trust has to pace its expansion as it usually caps ALR at 40%.
  1. Divesting to rejuvenate portfolio of logistics assets. Mapletree Logistics Trust could step up divestments of low-yielding assets in Singapore, Malaysia, South Korea and Japan. Mapletree Logistics Trust usually distributes the gains from divestments to shareholders but re-invests capital in modern and high-specification logistics assets.
  2. Re-activated DRP. Mapletree Logistics Trust has re-introduced distribution reinvestment plan (DRP) with issue price at a discount of 2%. DRP gradually replenish equity capital with participation from both institutional and retail investors. DRP was well received with acceptance rate at 46-48% in 1HFY19.

STOCK IMPACT

Cautious outlook.

• Escalating trade tensions continue to weigh on business sentiment and could impact investment and trade, and dampen global growth. PMI (Manufacturing) has receded from 52.8 Dec 17 to 51.1 in Dec 18. In particular, PMI (Manufacturing) - Electronics has dropped from 53.2 to 49.8, staying below 50 for two consecutive months.
• Management is carefully monitoring the evolving environment, but noted that their assets are largely used to support domestic consumption.

Focus on domestic consumption mitigates impact from trade conflict.

• Management gauges that Mapletree Logistics Trust’s exposure to domestic consumption is 80% compared to 20% for export-oriented activities. The estimation is based on goods carried in its portfolio of warehouses.
• Mapletree Logistics Trust’s tenant mix is skewed towards consumer goods, which accounted for 66% of gross revenue (Food & Beverage 22%, electronics & IT 13%, consumer durables 12%, fashion, apparel & cosmetics 5% and etc.). The focus on domestic consumption would cushion potential negative impact from escalation in trade conflict.

EARNINGS REVISION/RISK

• We have trimmed 2019-21F DPU by 1-4%, factoring in recent acquisitions in Singapore and Vietnam, as well as equity fund raising in 1HFY19, and fine-tuning the rental assumptions.

VALUATION/RECOMMENDATION

• Maintain HOLD with higher target price of S$1.39. Our valuation is based on DDM (required rate of return: 6.8%, terminal growth: 1.5%). Entry price: S$1.26.

SHARE PRICE CATALYST

• Positive newsflow on industrial rents and occupancy.

Jonathan Koh CFA UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2019-01-11

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.39 UP 1.360