Mapletree Industrial Trust - DBS Research 2020-01-22: A New Dawn


Mapletree Industrial Trust - A New Dawn

  • Raising Target Price to a new high of S$3.00 as Mapletree Industrial Trust leverages on the virtuous growth cycle.
  • Operational metrics improving; DPU growth to accelerate on the back of completed acquisitions.
  • More capacity to acquire; we have imputed S$300m worth of acquisitions in our estimates.
  • Maintain BUY with total return of 13%.

Maintain BUY with a higher Target Price of S$3.00.

Virtuous growth cycle

DPU achieves a new record, ahead of expectations.

  • Despite the more subdued macro backdrop, Mapletree Industrial Trust’s diversified portfolio continues to grind out strong numbers. 3QFY20 revenues and net property income (NPI) came in 9.7% and 14.0% higher y-o-y to S$102.6m and S$81.9m respectively. 3QFY20 distributable income rose 19.2% to S$69.4m, translating to DPU of 3.16 Scts.
  • On a YTD basis, 9MFY20 revenues and NPI came in 9.7% and 13.2% higher y-o-y to S$304.1m and S$239.8m respectively. The stronger operational numbers were primarily from past acquisitions of 18 Tai Seng, 7 Tai Seng and Mapletree Sunview 1 and contribution from the development/repurpose of 30A Kallang Place and 7 Tai Seng Drive.
  • Keeping a tight lid on expenses, costs in 9MFY20 were lower by S$1.1m from lower property maintenance expenses and utilities, which more than offset the higher property taxes for 18 Tai Seng and marketing commissions. The contribution from the acquisition of the Turnkey portfolio in the USA (1 Nov 2019) drove a 20.5% increase in associate income in 9MFY20. As a result, 9MFY20 distributable income rose by 14.2% to S$196.2m translating to a 3.4% rise in DPU to 9.39 Scts, +2.9% y-o-y. YTD DPU forms 77% of our full year forecasts, slightly ahead of expectations
  • Looking ahead, with the acquisition of 10 powered shell data centres completing on 14 Jan 2020, we are anticipating subsequent quarters’ results to strengthen further with contribution from this portfolio of assets.

Operating metrics remain resilient.

  • Portfolio occupancy rates remained stable at 90.5% (vs 90.2% in 2QFY20) with retention rate high at c.73% for the quarter. We saw an overall improvement in occupancy rates across most asset classes - Hi-Tech hit a high of 98.4% vs 96.9% in 2Q20, Business Parks 85.1% vs 81.9% in 2QFY20 due to improvement in occupancy rates at The Strategy building.
  • Occupancy at its stack-ups and light industrial buildings remained stable at 90.4% and 81.0% respectively. Mapletree Industrial Trust’s flatted factories saw a slight dip to 87.5% (vs 88.1% a quarter ago) mainly due to progressive re-location of tenants at Kolam Ayer cluster, as the redevelopment of the site is expected to commence in 2H20.

Rental reversionary trends still mix.

  • We are seeing green shoots emerging from its rental reversionary profile in 4QFY20, where most segments are recording flattish/positive rental reversions for renewals and new leases. While we note that new rents at the flatted factories appear low at S$1.54psf/mth (vs passing rent of S$1.76 psf/mth), we understand this is pulled down by the leasing incentives for the displaced tenants at the Kolam Ayer cluster. Stripping out this impact, new rents signed would have been higher at S$1.85psf/mth range.
  • We note that Mapletree Industrial Trust continues to offer strong income visibility with a weighted average lease expiry of 3.9 years with only c.2.0% of its leases up for renewal in 4QFY20. The Manager will be looking to renew c.18%-20% of its leases annually, a majority coming from flatted factories. Given the widening spreads between expiring and market rents, we anticipate renewal reversions to base out and turn positive.

Hitting an optimal gearing level.

  • Gearing inched higher to 34.1% as at 31 Dec 2019 which is still at a comfortable level in our view. This came from additional loans taken to part fund the Turnkey portfolio and is projected to increased higher to c.36%-37% in 4QFY20. The all-in cost of funds remains stable at c.3.0%, a slight up-tick from 2.9% in 2QFY20.

Robust outlook driven by acquisitions and continued asset rejuvenation; pricing in acquisitions in our estimates.

  • We remain excited on the outlook for Mapletree Industrial Trust, driven by ongoing asset rejuvenation from the development of Kolam Ayer 2 cluster (S$263m development costs, completing in 2H2022), while near term distributions will be boosted by the acquisition of 13 data centers in the USA, together with its Sponsor. While there is opportunity for Mapletree Industrial Trust to take on the Sponsor’s 60% stake in the first portfolio of USA data centers, we understand that the Manager is reviewing other acquisitions (3rd party + Sponsor) which will be accretive if executed upon.
  • We have priced in S$300m acquisitions @ 6.0% yield, in our estimates, funded by 50% debt and 50% equity, completing by the end of FY21F. Our Target Price is raised to S$3.00 as a result.

Where we differ: A data centre play.

Derek TAN DBS Group Research | Singapore Research Team DBS Research | 2020-01-22
SGX Stock Analyst Report BUY MAINTAIN BUY 3.00 UP 2.750