Mapletree Industrial Trust - DBS Research 2019-02-20: Lighthouse In Stormy Weather

MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)

Mapletree Industrial Trust - Lighthouse In Stormy Weather

New equity injection empowers Mapletree Industrial Trust with greater financial capacity.
Management continues to add value to the portfolio while ongoing developments drive NAV growth.
BUY, Target Price raised to S$2.30.

We maintain our BUY call with a higher Target Price of S$2.30 on Mapletree Industrial Trust (SGX:ME8U).
With the recent equity injection, Mapletree Industrial Trust has expanded its financial capacity to take on opportunistic acquisitions. In the meantime, we expect Mapletree Industrial Trust to deliver steady earnings CAGR of 3.0% which is at the higher end of its peer range, and the stock offers an attractive yield of > 6.0%.

We are firm believers of Mapletree Industrial Trust’s overseas ventures and gather that investors will continue to accord the REIT strong valuations given its ability to offer “strong certainty of growth”. The manager’s well-timed acquisitions and completions of development projects underpin a steady growth profile and more importantly, a constant upgrade and refresh of the portfolio that is resistant to business cycle fluctuations.

We see the recent acquisition of 18 Tai Seng to be value accretive. Apart from being a major driver to topline and distributions in FY20, Mapletree Industrial Trust’s superior portfolio specifications will enable the REIT to gain access and attract a wider group of industrial tenants to its portfolio.
In addition, the redevelopment of 7 Tai Seng into a data center will also drive asset values going forward. These value accretive developments in our view justifies Mapletree Industrial Trust to trade at a above peer P/NAV of 1.3x-1.4x.

Mapletree Industrial Trust’s resilience is a value trait in this market but this has yet to be reflected in Mapletree Industrial Trust’s share price. We maintain our BUY call and raise our Target Price to S$2.30 to reflect recent acquisitions and fund raisings.

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

Mapletree Industrial Trust recently announced an equity placement exercise (EFR), issuing S$200m worth of new equity which will be deployed to part fund the acquisition of 18 Tai Seng, which was recently completed. The EFR was well received at 2.2x covered, priced at S$1.945/unit, representing 3.3% discount to the adjusted VWAP.
We believe that the manager has taken advantage of Mapletree Industrial Trust’s strong share price performance to raise more equity than initially expected (c.74% of the purchase price of S$271m), which is a positive move given that the additional debt funding capacity will enable the manager to take on more opportunities as they arise in the medium term. We estimate Mapletree Industrial Trust has debt funded headroom of close to S$400m, taking it to its 40% gearing target.
Our estimates are updated to reflect the EFR and contribution from 18 Tai Seng, which we have conservatively assumed to start in FY2020 As a result, our DPU estimates are raised by 0.6% in FY20 and FY21.
Gearing level is maintained at c.34.7% ( on a see-through basis) post deal which is still within management’s comfortable range.

Mapletree Industrial Trust is projected to continue delivering an attractive growth profile of 3.0% CAGR over FY20-21 on the back of:
1. full year contribution from the acquisition of 18 Tai Seng,
2. stable portfolio occupancy rates with upside bias as we expect the continued lease up of 30 Kallang Way (c.89% committed but physical occupancy of only 38% as of Dec’18 was recorded on the books), and
3. completion of the upgrading of 7 Tai Seng Drive by end of 2HCY19 (total development cost of S$95m, including purchase consideration of S$68.0m for the property).

Our Target Price is raised to S$2.30 to account for the recent capital market activity. At our target price, Mapletree Industrial Trust offers a total return of 22% (16% upside + 6% yield).

Derek TAN DBS Group Research | Mervin SONG CFA DBS Research | Carmen Tay DBS Research | https://www.dbsvickers.com/ 2019-02-20

SGX Stock Analyst Report BUY MAINTAIN BUY 2.30 UP 2.220