Mapletree Logistics Trust - UOB Kay Hian 2020-07-22: 1QFY21 Quality Modern Portfolio But Distribution Yield Overly Compressed; Downgrade To HOLD

MAPLETREE LOGISTICS TRUST (SGX:M44U)

Mapletree Logistics Trust - 1QFY21 Quality Modern Portfolio But Distribution Yield Overly Compressed; Downgrade To HOLD

Mapletree Logistics Trust achieved positive rental reversion of 1.9% while portfolio occupancy remained stable at 97.2%. All tenants have resumed operations, except for 1.3% of the revenue base.
Mapletree Logistics Trust benefits from growth in e-commerce transactions, which account for 25-30% of its overall business. However, FY21 distribution yield has compressed to 4.1%. Downgrade to HOLD.

Gross revenue and NPI grew 10.5% and 12% y-o-y respectively due to higher revenue from existing properties and acquisitions completed in FY20 - nine properties in China (50% stake in four properties), Vietnam (Hanoi and Ho Chi Minh), Malaysia (Shah Alam), South Korea (Seoul) and Japan (Kobe) - offset by rental rebates to eligible tenants and divestments completed in FY20 (five Japan properties and Waigaoqiao Logistics Park).

Mapletree Logistics Trust has renewed or replaced 3.9m sf of leases in 1QFY21. It achieved positive rental reversion of 1.9%, coming from China (+4.8%), Hong Kong (+2.5%), Malaysia (+2.5%) and Vietnam (+4.6%).

Portfolio occupancy slipped 0.8ppt q-o-q to 97.2% as of Jun 20. Occupancy for China dropped 4ppt q-o-q to 92.3% due to Ouluo Logistic Park Phase 2 redevelopment in Shanghai, which added 434,300sf of logistics space (Mapletree Logistics Trust has since secured tenants for 44% of the new space). Occupancy for South Korea eased marginally by 1.3ppt q-o-q to 94.7%.

Debt outstanding increased by S$62m as Mapletree Logistics Trust set aside more operating cash in various countries for financial flexibility. Aggregate leverage edged higher by 0.3ppt q-o-q to 39.6%. Weighted average annualised interest rate dropped 0.2ppt q-o-q to 2.3%. Interest coverage ratio is healthy at 4.8x.

All tenants have resumed operations, except for 1.3% of revenue base. COVID-19 accelerated e-commerce growth and supply chain diversification, which has a positive impact on demand for logistics space. Management estimated rental rebates and deferrals at S$5m-10m for FY21. Mapletree Logistics Trust has provided rental rebates of S$4m and rental deferrals of S$1.7m in 1QFY21.

Many multinational companies have adopted the China Plus One strategy due to the rising cost of doing business in China. The COVID-19 pandemic has resulted in more companies looking to adopt China Plus One strategy to build more resilient and diversified supply chain.
About 20-40% of Mapletree Logistics Trust’s tenants in China are evaluating expansion overseas. Management sees Vietnam and Malaysia as prime beneficiaries of China Plus One strategy.

The market is flush with liquidity and many private equity funds are chasing deals. This has resulted in a divergence between rents and capital values, which causes compression in cap rates, especially in China. Fortunately, Mapletree Logistics Trust could tap on its sponsor pipeline for acquisitions in Vietnam, Malaysia and China.

Management does not see the need to withhold distribution. It has a strong cash position of S$244.6m. It has more than S$530m of available committed credit facilities, which is more than sufficient to refinance debt of S$139m due in FY21 and S$217m due in FY22.

Mapletree Logistics Trust is acquiring a newly built freehold logistics facility in Brisbane, Australia, for A$21.3m (S$20.2m). The property has Grade A building specifications, including minimum clear height of 10m, floor loading capacity of 30kPa and is column-free. It is on a 10-year lease to quality tenant, Decina, Australia’s largest specialist bath, spa bath and shower manufacturer serving markets in the Middle East, Europe and Asia. It is expected to generate an initial NPI yield of 5.4%. The acquisition is expected to complete in 3QFY21.
Brisbane’s logistics market is expected to be a beneficiary of several major infrastructure developments, which include Brisbane Airport’s second runway, improvement works to Brisbane Port and a new inland freight rail line between Melbourne and Brisbane. The acquisition will expand Mapletree Logistics Trust’s footprint in Australia to 11 properties with a combined GFA of 3m sf.

We maintain our DPU forecasts. Downgrade to HOLD.
Mapletree Logistics Trust's share price has rallied 17.2% ytd and upside is limited. Our valuation of S$2.08 is based on DDM (required rate of return: 6.0%, terminal growth: 2.0%). Entry price is S$1.88.
See Mapletree Logistics Trust Share Price; Mapletree Logistics Trust Target Price; Mapletree Logistics Trust Analyst Reports; Mapletree Logistics Trust Dividend History; Mapletree Logistics Trust Announcements; Mapletree Logistics Trust Latest News.
Mapletree Logistics Trust's share price catalysts:
- Accretive acquisitions to rejuvenate and reposition towards modern specifications logistics facilities, including those from sponsor pipeline.
- Asset enhancement initiatives in Singapore, Malaysia, South Korea and Japan.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-07-22

SGX Stock Analyst Report HOLD DOWNGRADE BUY 2.080 SAME 2.080