Mapletree Industrial Trust - DBS Research 2020-07-22: Riding On Digital Tailwinds

MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)

Mapletree Industrial Trust - Riding On Digital Tailwinds

Mapletree Industrial Trust's 1QFY21 DPU (after retention) in line.
Operational metrics resilient; leaning towards more datacenters to drive growth in FY21-22F.
Upside from ongoing redevelopment projects at Kolam Ayer anchors medium term growth outlook.

As 1QFY21 suffered the full brunt of the circuit breaker during Apr-May, Mapletree Industrial Trust (SGX:ME8U) took a cautious stance and withheld S$7.1m (total S$13.7m since 4QFY20) from its tax exempt income to maintain flexibility in cash management. The total amount withheld is expected to be released from 2QFY21 onwards when majority of rebates are expected to be expensed.
Mapletree Industrial Trust's overall financial performance was in line with expectations.
1QFY21 revenues declined 0.5% y-o-y to S$99.1m while net property income (NPI) increased by 0.9% to S$78.7m. The weaker topline came mainly from rental rebates as part of its COVID-19 Assistance and Relief Programme, slightly offset by the full quarter revenue contribution from 7 Tai Seng, The Strategy, and 30A Kallang Place.
Mapletree Industrial Trust's distributable income rose by 11.6% to S$70.6m, driven by higher contribution from its JVs from its expanded US datacenter portfolio. After retaining S$7.1m, DPU was 2.87 Scts, (-7.4% y-o-y; +0.7% q-o-q), in line with our projections.

Management provided an update on its operations. Around 70% of its tenants are in the essential services sector and continued operating during the circuit breaker period. Approximately 90% of its tenants in Singapore have now resumed operations.
The Manager estimates that overall rental reliefs (either mandatory or planned) could amount to S$20m in FY21, which we have factored into our estimates. Retained sum of S$13.7m will be paid out in stages to negate the impact of these reliefs in the coming quarter. Rental arrears rose marginally to 1.0% of revenues in 1QFY21 from 0.2% a quarter ago, which is still manageable in our view.

Gearing increased marginally to 38.8% from 37.6% a quarter ago. Approximately 86.3% of borrowings are on fixed rates. Debt cost declined to 2.6% (vs 2.9% a quarter ago). Interest cover remained robust at 7.9x (trailing 12-mth ICR is 7.2x).
Mapletree Industrial Trust has only S$45m of debt expiring in the coming financial year which should be easily renewed. Post the planned acquisition of its 60% stake in 14 datacenters in the US, we estimate gearing to remain stable.

Portfolio occupancy was stable at 91.1% (vs 91.5 in 4QFY20). Retention rate was high at c.81% for the quarter, which we reckon was due to the lack of movement and relocation during the circuit breaker.
We note that Mapletree Industrial Trust’s flatted factories saw a slight dip to 85.4% (vs 86.2% a quarter ago) mainly due to progressive re-location of tenants at the Kolam Ayer cluster, where redevelopment of the site is expected to commence in the second half of this year. We note that close to 74 out of 108 existing tenants remained within the portfolio at alternative clusters. Excluding this impact, the flatted factory portfolio would have seen higher occupancy rates at close to the 88% level.

Leasing was active during the quarter with high renewals across various subsectors. There was a general drop in rental reversionary trends to -1.2% to -1.9%, which is within estimates given the soft operating climate. There was a significant lease renewal at its Business Park cluster (108.8k sqft) where anchor tenant Sony renewed its lease at The Strategy.
Given the fragile economic outlook, the manufacturing sector is expected to be impacted and Mapletree Industrial Trust, as one of the largest landlords in Singapore, will likely be hit. We believe the Manager will take on the strategy of managing occupancy at the expense of rental growth in FY21 in order to defend cashflows.

We remain excited on Mapletree Industrial Trust’s outlook, driven by the completion of its planned acquisition of a 60% stake in 14 datacenters in the US in 2QFY21, ongoing asset rejuvenation from the development of Kolam Ayer 2 cluster (S$263m development costs, completion in 2H2022) coupled with full year contribution from its 50% stake in 13 data-centers in the US that was completed last quarter.
We maintain our BUY call on Mapletree Industrial Trust and Target Price of S$3.25 based on DCF.
See Mapletree Industrial Trust Share Price; Mapletree Industrial Trust Target Price; Mapletree Industrial Trust Analyst Reports; Mapletree Industrial Trust Dividend History; Mapletree Industrial Trust Announcements; Mapletree Industrial Trust Latest News.

Derek TAN DBS Group Research | Dale LAI DBS Research | https://www.dbsvickers.com/ 2020-07-22

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