Mapletree Industrial Trust - CGS-CIMB Research 2020-10-30: Headwinds Persist

MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)

Mapletree Industrial Trust - Headwinds Persist

Mapletree Industrial Trust's 2Q/1HFY3/21 DPU within our expectations, at 25.4%/48.8% of our FY21F forecast.
Average Singapore rents declined q-o-q; portfolio occupancy at 91.5%.
Reiterate HOLD rating with a higher DDM-based Target Price of S$3.03.

Mapletree Industrial Trust (SGX:ME8U) reported a 1.5%/2% y-o-y rise in 2QFY3/21 revenue/NPI to S$103.4m/S$81.6m respectively, due to the consolidation of the 14 US data centres (DC), partly offset by the impact of rental rebates extended to tenants and decantment of tenants at Kolam Ayer 2 (KA2).
The amount available for distribution of S$72.9m (+14.8% y-o-y) translates to a DPU of 3.1 Scts (-1% y-o-y) following a private placement exercise to acquire the remaining 60% of the US DCs.
Mapletree Industrial Trust did not retain any income in 2Q in view of the gradual stabilisation of the COVID-19 situation in Singapore.

Mapletree Industrial Trust's portfolio occupancy averaged 91.5% at end-2Q, while average Singapore rents slid 2.4% q-o-q, dragged largely by lower signing rents for new leases at its flatted factories segment.
Looking ahead, Mapletree Industrial Trust expects the drag on rents to persist over the next few quarters. Mapletree Industrial Trust also shared that rental arrears as at Sep 2020 increased to 1.4% of the previous 12 months’ revenue; it is working with tenants on rental restructuring plans.
Mapletree Industrial Trust indicated that it extended S$7.1m of rental reliefs to tenants in 1HFY3/21 and expects additional reliefs to be given for the rest of FY21F. Mapletree Industrial Trust has 6.5%/15.4% of its gross rental income to be renewed for the rest of FY21F/FY22F.

In terms of inorganic growth, Mapletree Industrial Trust announced the proposed acquisition of a DC and office in Virginia, US for US$200.6m-262.1m. According to management, the deal is expected to complete in 1QCY21F.
In addition, Equinix Singapore (EQIX US, Not Rated) exercised its option to buy 26A Ayer Rajah Crescent from Mapletree Industrial Trust for S$125m. Management expects the transaction to be completed in 4QCY20F. Mapletree Industrial Trust indicated that it will distribute the divestment profits of c.S$19m to unitholders over 3 years, although the timeline has yet to be determined. This will likely help offset the loss of income from the property and enable the trust to recycle capital, in our view.
We have not factored in any impact of the acquisition and divestment into our current estimates. Furthermore, the planned redevelopment of KA2 into a new hi-tech industrial precinct has progressed with demolition works currently underway and completion scheduled in 2H2022F.
While, we believe, the COVID-19 situation could impact construction cost, benefits from future-proofing its portfolio remain intact. With a gearing of 38.1% at end 2Q, Mapletree Industrial Trust is well positioned to continue to tap inorganic growth opportunities, in our view.

We leave our Mapletree Industrial Trust's FY21-23F DPU estimates unchanged but raise our Target Price to S$3.03 as we roll forward our DDM assumptions to FY22F and adopt a slightly lower cost of equity as Mapletree Industrial Trust continues to expand its exposure to the fast-growing data centre segment.
We maintain our HOLD rating.
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.
Upside risk: earnings upside from the US DC acquisition and distribution of divestment gains.
Downside risk: protracted recovery leading to longer and larger than projected vacancies.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-10-30

SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.03 UP 2.870