Mapletree Logistics Trust - OCBC Investment 2019-04-18: No Impact For Now; But Overhang Remains


Mapletree Logistics Trust - No Impact For Now; But Overhang Remains

  • CWT Pte Ltd still paying rents.
  • Assets are of good quality.
  • Uncertainties over longer-term outlook.

No impact for now from CWT Pte Ltd

What’s the worst case scenario?

  • In our view, the worst case scenario would be a rental default by CWT Pte Ltd.
  • Approximately 30% of Mapletree Logistics Trust’s gross revenue from CWT Pte Ltd is contributed by third party end-users who have sub-lease agreements with CWT Pte Ltd. In the event of a default, we believe Mapletree Logistics Trust will be able to go directly to the end-users to negotiate fresh leases and mitigate any downtime. While this would mean a conversion from a master lease structure on a double-net basis (on NLA) to a multi-tenanted building (MTB) structure, we believe Mapletree Logistics Trust will be able to ‘gross up’ the rentals (on NLA) to take into account the property taxes and maintenance expenses, such that the overall NPI margin will remain similar.
  • The trickier part would be the balance 70% contribution by CWT Pte Ltd, whereby CWT Pte Ltd acts as a 3rd-party logistics provider to third party end-users under service agreements. If there is a rental default, Mapletree Logistics Trust would have to find a replacement 3rd-party logistics provider that matches the requirements and pricing of the end-users. This could take a few months.
  • The silver-lining is that Mapletree Logistics Trust currently holds security deposits of six months of rental in relation to the leases with CWT Pte Ltd. Hence, any impact is likely limited for now, in our opinion. Furthermore, we opine that the five ramp-up warehouses leased to CWT Pte Ltd are modern with good specifications.

Some uncertainties over longer-term outlook

  • While we are not expecting any near-term impact to Mapletree Logistics Trust’s DPU and keep our forecasts unchanged for now, we believe this situation has created an overhang over CWT Pte Ltd’s longer-term outlook, and thus some uncertainties for Mapletree Logistics Trust. As such, we raise our cost of equity assumption from 7.5% to 7.7%.
  • Consequently, our fair value is lowered from S$1.50 to S$1.45.

Andy Wong Teck Ching CFA OCBC Investment Research | https://www.iocbc.com/ 2019-04-18
SGX Stock Analyst Report BUY MAINTAIN BUY 1.45 DOWN 1.500