Mapletree Logistics Trust - DBS Research 2019-04-29: Diamond In The Sky

MAPLETREE LOGISTICS TRUST (SGX:M44U)

Mapletree Logistics Trust - Diamond In The Sky

Well-timed acquisitions and divestments bring portfolio performance to new highs.
Mapletree Logistics Trust's 4Q19 DPU rise of 4.5% to 2.024 Scts, which is commendable on top of a 18% increase in unit base.
Pricing in S$500m of acquisitions in FY20 as manager remains on a hunt for value accretive deals.
Target Price raised to S$1.60 as we roll forward our valuation base.

We believe that all growth engines are firing and MAPLETREE LOGISTICS TRUST (SGX:M44U) remains firmly on the acquisition growth path.
Well-timed acquisitions and ongoing asset reconstitution strategy is projected to augment a steady DPU growth profile of 1%-4% over FY20-21F with upside from potential gains that the manager will typically share when it happens. Coupled with a strong balance sheet, we have assumed S$500m of new acquisitions in FY20F.
Target Price is raised to S$1.60 as a result. BUY!

Market is not according Mapletree Logistics Trust the right valuation. Recent 4Q19 results is also an indicator that the worst is over and most of Mapletree Logistics Trust’s major markets continue to offer organic growth while the manager remains on the hunt for more value-accretive acquisitions. Our Target Price of S$1.60 is above consensus and we believe the street has not factored the REIT’s potential to surprise on the upside organically and through more acquisitions.
Mapletree Logistics Trust, through its focus in its key markets of Hong Kong, Singapore, Japan and Australia, offers stronger income visibility and growth than before.

We have assumed S$500m of acquisitions in FY20, to be 100% debt funded, and this is not priced in by consensus at this point. Opportunities will likely come from its Sponsor which has an extensive pipeline of acquisition opportunities.
In addition, any clarity on the financial strength of major tenant, CWT, will mean improved confidence which would lead to a higher price for Mapletree Logistics Trust in the medium term.

We maintain our BUY call with higher Target Price of S$1.60 as we roll forward our valuation base.

Acquisitions ramping up faster than expected. A faster-than-projected acquisition pace and/or a better-than-expected outlook for the Singapore warehouse market will translate into positive adjustments to our earnings estimates.

Mapletree Logistics Trust recorded commendable 2.04 Scts DPU in 4Q19, up 4.5% y-o-y. FY19 DPU was 7.94 Scts (+4.2% y-o-y). Topline and net property income in 4Q19 were 13% and 15% higher y-o-y to S$121.4m and S$105.0m, boosted by the combination of well-timed accretive acquisitions (c.s$1.2bn acquired over 1QFY19- 4Q19) and redevelopments (76 Pioneer Road, Mapletree Ouluo phase1). This was supported by stable operating metrics for its key markets of Singapore, Hong Kong, Australia and China which saw occupancy rates remaining strong at 98.0% and positive rental reversions of 2.0%. These more than offset the impact of divestments of two properties during FY19.
In 4Q19, finance cost rose 37.4% y-o-y due to higher borrowings to part fund its acquisitions. The acquisitions underpinned the strong 22.2% uplift in distributable income to unitholders to S$77.5m. This was partly boosted by the payment of disposal gains from 7 Tai Seng Drive, 531 Bukit Batok Street 23 and 4 Toh Tuck Link. Due to the enlarged share base, DPU increased by a smaller 4.5% to 2.024 Scts.

Following the successful acquisition of 11 properties (50% interest) in China and a portfolio of 5 ramp-up properties in Singapore, and divestment of selected older specification properties, Mapletree Logistics Trust continued to see steady overall occupancy of 98.0% in 4Q19 (3Q19: 97.7%). The improvement mainly came from higher take-up rates from Korea (99.1% in 4Q19 vs 98.0% in 3Q19), Singapore (97.4% in 4Q19 vs 97.0% in 3Q19), offset by a slight dip in China (95.5% in 4Q19 vs 95.8% in 3Q19).
The space returned by JD.com at one of its warehouses has been back-filled by c.60%, a good sign in our view, implying that the quality specifications of the portfolio continue to attract tenants. The rest of its other core markets of Hong Kong, Malaysia, Australia, Vietnam are fully occupied. Mapletree Logistics Trust also reported a strong rental reversion of 2.0% for FY19, mainly from Hong Kong, Vietnam, China, and Singapore.

The manager highlighted that CWT is prompt in rental payments and it is monitoring the situation closely. While we acknowledge that the financial stress is at the Hong Kong entity (sponsor level and not the tenant, CWT Pte. Ltd), we gain comfort that the rent payable by CWT is at current market level, implying that in the worst case scenario, we do not foresee any major downside to distributions.

Portfolio cost of debt was 2.7% in 4Q19 vs 2.7% in 3Q19 and 2.4% in 4Q18. Gearing remained stable at 37.7% in 4Q19, largely due to loans to partially fund the acquisitions of five properties in Singapore, redevelopment projects and recent acquisitions in Korea, Vietnam and Australia which more than offset the partial use of divestment proceeds and DRP.
The weighted debt duration remains long at 4.1 years and the proportion of debt hedged via fixed rates remained high at c.85%, slightly higher than a quarter ago.
Portfolio valuations were written up on the back of a combination of a 10-25bps compression in cap rates for the portfolio and strong cash flows. NAV/unit increased to S$1.17/unit.

In 1QFY20, Mapletree Logistics Trust reported the sale of 5 properties in Japan for JPY17.5bn (S$213.3m), resulting in a gain of c.S$8.5m, which the manager has indicated that it is likely pay the gains to unitholders over the next 8 quarters.
The manager is looking to pay off debt in the near term, leading to a lower net gearing of c. 36.2% by 1QFY20.
With an active pipeline from the Sponsor and a myriad of opportunities from third parties across its key operating markets, we believe the manager is keen to re-invest the proceeds and utilise its debt headroom to drive accretive acquisitions.
We have adjusted our acquisition assumptions, imputing S$500m in acquisitions from 2HFY20 that will be debt funded to bring gearing levels up to a more optimal c.38%-39%.

Derek TAN DBS Group Research | Carmen TAY DBS Research | Mervin SONG CFA DBS Research | https://www.dbsvickers.com/ 2019-04-29

SGX Stock Analyst Report BUY MAINTAIN BUY 1.60 UP 1.500