Mapletree Industrial Trust - DBS Research 2019-07-10: Unearthing “Gold” Within Its Portfolio


Mapletree Industrial Trust - Unearthing “Gold” Within Its Portfolio

  • New exciting redevelopment project at Kolam Ayer 2 cluster to augment medium term growth for Mapletree Industrial Trust (SGX:ME8U).
  • Ample gearing capacity to take on redevelopment; near-term disruption to be managed.
  • Continue to look at acquisition opportunities given conductive cost of capital.
  • Target Price raised to S$2.50 on the back of lower WACC assumptions, contribution from development projects.

Maintain BUY with a higher Target Price of S$2.50.

  • We maintain our BUY call with a higher Target Price of S$2.50 on MAPLETREE INDUSTRIAL TRUST (SGX:ME8U).
  • We like management’s strategy of continuing to realise value within its portfolio, driving NAV and DPUs higher in the medium term.
  • Our Target Price is raised to S$2.50 on the back of recent developments, coupled with lower WACC assumptions. Maintain BUY!

Where We Differ: Diversity is the right strategy.

  • We are firm believers of Mapletree Industrial Trust’s inorganic growth strategy with a focus on developments in Singapore. The manager’s well-timed acquisitions and completions/initiation of new development projects underpin a steady growth profile and more importantly, a constant upgrade and refresh of the portfolio that in our view, will be more resistant to business cycle fluctuations.

Development of Kolam Ayer 2 Cluster to drive longer-term value.

  • The latest redevelopment at Kolam S$263m in 2H22, the strong offered by the REIT’s largely located. Upon completion, the project projected to a return investment (ROI) of 80%, which we will more than quadrupling asset’s current. This, along with the of more of such in the future, Mapletree Industrial Trust’s above-peer P/NAV of 15x, in our view.


  • Mapletree Industrial Trust’s resilience is a trait in this market will higher. We maintain our BUY call and raise our Target Price to S$2.50 to reflect developments and lower WACC (-0.5%/- 0.25% for risk-of debt assumptions.

Key Risks to Our View:

  • Rising interest rates. An increase in refinancing rates will be negative to distributions.

WHAT’S NEW - Undertaking major redevelopment at Kolam Ayer 2 Cluster

  • Mapletree Industrial Trust has announced the proposed redevelopment of Kolam Singapore into a high cost of S$263m. The site sits on left from 2019 (43 years from July 2008). The proposed redevelopment will entail the following:
    1. upgrade of the two current flatted factory building + amenity centre into a high-specification precinct,
    2. an increase in plot ratio from 1.5x to 2.5x, and
    3. increase in leasable area (GLA) from 506,720 sqft to 865,600 sqft.
  • About 24.4% to be anchored by a German medical services tenant (BTS) on a 15-year + 5-year + 5-year lease, with the remainder to be leased to other tenants.
  • The manager hopes to attract high value-add and knowledge-based businesses in the advanced manufacturing, information and communications technology to the site, post the strong demand seen at the recent leasing activity at 30A Kallang Way which is reportedly 100% pre-committed.
  • The development is expected to complete in 2H22, which is c.3 years from now.

A tenant assistance package (TAP) for existing affected tenants.

  • Mapletree Industrial Trust is offering a tenant assistance package for existing affected tenants at the Kolam Ayer 2 Cluster which offers an extended 12-month notice period coupled with a discount of 7-33% from average rental rates for new leases at other clusters.
  • Mapletree Industrial Trust has set aside 469,000 sqft (or about 1.6x) the current space taken up by the tenants at other clusters.
  • If the tenants do not take up the TAP, they will be given a cash subsidy of c.6 months’ rents based on the preferential gross rental rates.
  • With a portfolio occupancy of 87.9% (as of end-FY19), this “replacement” demand from tenants at Kolam Ayer Cluster 2 allows Mapletree Industrial Trust to fill up space at its existing clusters, some of which might be deemed to be sticky vacancies. We believe this will be positive for the stock.

Our thoughts:

Resetting its medium-term growth runway.

  • We are positive on this development as it once again shows the deep value that Mapletree Industrial Trust offers to investors. With a centrally concentrated portfolio in Singapore, the manager has once again demonstrated the preference to unearth value and remodel its portfolio into one that is “future ready”, resetting its growth runway in the longer term.
  • We believe that the new high-specification property will enable Mapletree Industrial Trust to attract better-quality tenants to its portfolio. In fact, one target market could be the value chain (downstream/upstream suppliers) of the German medical tenant.
  • The ability to extract and fully optimise its unutilised plot ratio once again justifies the premium that Mapletree Industrial Trust deserves to trade above its book value.

Near-term earnings downside acknowledged; but a much sweeter long-term growth profile with revenues projected to quadruple upon completion.

  • The cluster’s estimated contribution to revenue is c. 1.8% in FY19A, while poses a near-term risk to earnings as the project development goes underway. That said, with a projected ROI of 8.0% on the development project (cost of S$263m), the prospects of quadrupling its revenue (4x) upon completion remains too sweet a prospect for investors to ignore.
  • While near-term DPUs might see some pressure, we believe that the manager has ample capacity (c. adjusting management fees in units) or look at other acquisitions to compensate for the earnings risk.
  • Mapletree Industrial Trust has sufficient debt-funded headroom to fund the deal, following which gearing is projected to increase from c.33% to 36%.

Derek TAN DBS Group Research | Carmen TAY DBS Research | Mervin SONG CFA DBS Research | https://www.dbsvickers.com/ 2019-07-10
SGX Stock Analyst Report BUY MAINTAIN BUY 2.50 UP 2.300