Mapletree Logistics Trust - DBS Research 2019-11-06: Making Inroads Into Key Asean Logistics Hubs

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MAPLETREE LOGISTICS TRUST (SGX:M44U)

Mapletree Logistics Trust - Making Inroads Into Key Asean Logistics Hubs

• Recent planned acquisitions of warehouses in Malaysia, Vietnam and China will propel Mapletree Logistics Trust to be a leading logistics player in ASEAN,
• Accretive deal, adding 1.0% to DPU,
• Expect further acquisitions of S$500m by mid-FY21,
• BUY; Target Price raised to S$1.90,

Unrivalled market leader; maintain BUY with higher Target Price of S$1.90.

• 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 c.4.0% CAGR over FY21-22F with upside from potential gains from divestments that the manager typically shares when it happens. See Mapletree Logistics Trust Dividend History.
• Maintain BUY with a higher Target Price of S$1.90 as we price in additional acquisitions in our forecasts. See Mapletree Logistics Trust Share Price; Mapletree Logistics Trust Target Price.

Impressive 2QFY20 results

2QFYMar20 DPU of 2.025 Scts backed by stable operating metrics.

• Mapletree Logistics Trust's 2QFY20 revenues increased 14.2% y-o-y to S$121.8m due to improved performance from its existing portfolio and contributions from
  1. the redevelopment of Ouluo Logistics Park Phase 1 (China) in 2QFY19; and
  2. acquisitions in Singapore, Australia, South Korea and Vietnam which were completed in 2HFY19.
• Contribution from these more than offset the income vacuum from divestments of xx assets in 1QFY20 and two in FY19, as well the impact of the weaker AUD, RMB and Korean Won against the SGD. However, these are mitigated by currency forward contracts to hedge against movements in these currencies. See Mapletree Logistics Trust Announcements.
• Net property income (NPI) increased by a higher 21.0% y-o-y to S$109.1m as a result of lower land rent of S$3.8m due to the adoption of SFRS(I)16 (reported under borrowing costs in 2QFY20). Adjusting for this impact, NPI would have increased by 16.0%.
• Distributable income rose by 15.4% to S$78.0m and S$73.7m after accounting for dividend for perpetual security holders. This translates to a DPU of 2.025 Scts (+3.5% y-o-y). 1HFY20 DPU of 4.05 Scts formed 50% of our full year forecast. See Mapletree Logistics Trust Dividend History.

Operating metrics remain resilient.

• Following the recent asset recycling plan to improve its portfolio quality and resiliency, Mapletree Logistics Trust’s occupancy rate was stable at 97.5% (vs 97.6% in 1QFY20).
• We saw higher take-up rates in Hong Kong ( 99.2% in 2QFY20 vs 97.6% in 1QFY20) owing to higher occupancy at Tsing Yi warehouse which offset a slight dip in occupancy in South Korea (98.5% in 2QFY20 vs 98.1% in 1QFY20) and China (95.4% in 2QFY20 vs 96.4% in 1QFY20). In China, we note that vacancy rate increased at its properties in Wuxi and Changshu. The REIT also managed to back fill 80% of the space vacated by JD.com in xx.
• Rental reversions remained steady at 1.8% in 2QFY20 (1.8% in 1QFY20), and this was seen across its leases from Hong Kong, Vietnam, Malaysia. Looking ahead, while Hong Kong has seen strong reversionary growth of 3%-4% in the past, the manager expects a modest but positive outlook, limited by supply.

Borrowing costs lower q-o-q, gearing dipped marginally.

• Portfolio cost of debt dipped to 2.6% (vs 2.8% in 1QFY20) due to extension of interest rate swaps at lower rates.
• Meanwhile, gearing increased marginally to 37.0% in 2QFY20 due to higher value of translated loans (JPY, HKD vs SGD) and S$11m drawn for capex.

Acquisition of a portfolio of 7 properties in Malaysia, Vietnam and China

Proposed acquisition of 7 properties at a total cost of c.S$422.0m.

• The manager also announced the proposed purchase of a portfolio of modern logistics properties from its Sponsor for an all-in acquisition cost of c.S$422.0m. See Mapletree Logistics Trust Announcements. This comprises of
  1. 100% interest in a warehouse in Shah Alam, Malaysia for RM826m (S$269.9m),
  2. 100% interest in 2 properties in Vietnam (US$ 38.9m (S$53.3m), and
  3. 50% interest in 4 properties in China (PRC) for RMB314.3m (S$60.7m) and 50% pro-rata share of the bank loans of the SPVs amounting to RMB 144m (S$27.8m), and
  4. associated fees amounting to S$10.2m.
• The agreed property value of S$493.4m (attributable cost of S$406.3m to reflect the 50% share in the PRC properties) on a 100% basis is at a discount of 2.3%-2.5% to independent valuations undertaken, ranging from 1.1%-1.4% discount for the Malaysian properties, 3.0%-3.4% discount for Vietnam and 3.7%-3.9% for the PRC properties.

Focused on ASEAN logistics.

• The target properties are anchored in Malaysia (c.64% of value) and Vietnam (c.13% of value), followed by China (c. 23% of value). The acquisitions come at an opportune time as the manager is seeing increasing demand for space among its tenants in key cities within the ASEAN region.
• Drivers are aplenty and the one key factor is the lack of quality modern logistics warehouses within Malaysia and Vietnam. Both these markets are experiencing strong domestic consumption led by the rising middle class and demand for space from e-commerce players is growing rapidly. The logistics hubs in Malaysia and Vietnam are also benefiting from the ongoing supply chain shift out of China partially driven by the US-China trade conflict where many multi-national companies are looking to relocate in these 2 countries attracted by the lower cost of doing business.

Initial yield estimated at 6.1%; while accretive to Mapletree Logistics Trust unitholders but represents a compression to existing portfolio yield.

• The target properties will be acquired at an estimated initial yield of 6.1% (5.7% for China, 6.9% for Malaysia and 6.9% for Vietnam). We note that these are tighter than the estimated average cap rates of 6.4% for China, 6.9% for Malaysia and 9.7% for Vietnam.
• We note that the properties are high quality modern logistics properties, developed by the Sponsor and catered to the high efficiency standards of logistics players (high ceiling, dock levelers and large floor plates).

A unique asset in Malaysia that is second to none.

• While the target transacted yields appear tight, we believe it is reflective of the strong demand for quality logistics properties across the region, resulting in a compression in returns.
• Specially for Malaysia, we understand that the Shah Alam properties with 2m sqft NLA are built to high specifications aimed at catering to the needs of e-commerce operators (FM2 flooring and sprinkler systems). There is robust demand for these properties, enabling them to achieve higher than market rents. Tenants at the property are e-commerce fulfillment and consumer tenants like Lazada, Shopee and Watsons.
• The Vietnam properties in Bac Ninh and Binh Duong are located within an emerging industrial hub, implying continued robust demand for properties.

Despite the short WALE of 1.9 years, the tenants within the target portfolio are of high quality.

• While the weighted average lease expiry (WALE) appears short at 1.9 years, we believe that there is reversionary upside when the leases are due given the tight supply in the target markets. The tenant base is expected to remain sticky and are expanding given that 90% cater to the consumer markets and of this, 45% are in the e-commerce business.

Accretive deals to drive further re-rating.

• We read that the recent strong participation of investors in the placement exercise raising S$250m (13x covered at higher end of S$1.617) indicate that investors are confident of Mapletree Logistics Trust’s medium term growth outlook. Infused with new capital, we believe that Mapletree Logistics Trust will continue to remain on the hunt for more asset acquisitions.
• After incorporating the recent placement and asset acquisition into our numbers (estimates are tweaked up by c.1%), we have also priced in acquisition assumption of S$500m from 2HFY21 (funded by 40% debt/60% equity in our estimates. Our Target Price is thus raised to S$1.90. See Mapletree Logistics Trust Share Price; Mapletree Logistics Trust Target Price.

Where we differ: Street high target price.

• We maintain our street high target price for Mapletree Logistics Trust as recent acquisitions in key hubs of Malaysia, Vietnam and China will further deepen Mapletree Logistics Trust’s exposure within the ASEAN and Asia’s logistics sector.
• We believe the street has yet to factor Mapletree Logistics Trust’s potential to continue to deliver accretive acquisitions. Mapletree Logistics Trust’s organic growth momentum is picking up with the supply squeeze in its key markets of Hong Kong and Singapore, where earnings visibility is strong.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2019-11-06

SGX Stock Analyst Report BUY MAINTAIN BUY 1.90 UP 1.850