MapleTree – OCBC

For higher-risk appetite investors

Cash call as expected. In our Dec 2007 report on Mapletree Logistics Trust (MLT), we articulated that MLT was likely to raise fresh equity within the next two quarters. This was based on the assumption that MLT’s gearing would breach the 60% allowable limit if all its recently announced acquisitions would be debt funded. Indeed, MLT has recently announced that it is seeking fresh equity of S$400m to S$500m via a rights issue. We estimate that if the proposed right goes through successfully, MLT’s gearing would fall to a more acceptable level of about 40%.

Some uncertainties. In the current climate of market volatility and sub prime woes, cash calls are unlikely to be well received. This is clearly reflected by a REIT’s recent cash call in the market which had to be priced much lower than expected. Furthermore, unlike other REITs which acquire assets conditional on successfully raising fresh equity, MLT’s financing model works on the basis of “buy now with debt and refinance later with equity”. This model has two weaknesses in that it exposes MLT to the volatility of the capital markets, and secondly as cash call is delayed until gearing limit is reached, it does not leave much room for maneuvering. In other words, MLT is totally exposed to the demands of the capital markets.

Parent underwriting the rights. The key issue is the pricing of the rights. Obviously the lower the price, more units will be issued and hence the dilutive impact would be greater. The good news is that in the case of MLT’s rights, its parent Mapletree Investment Pte Ltd (MIPL) has agreed to underwrite the issue by buying up all unsubscribed rights. This in turn should help support pricing of the rights and hopefully not lead to DPU dilution.

BUY, but for higher-risk appetite investors only. In the current uncertain capital market climate, it may be better to be less dependent on the capital markets. In that context, a more conservative growth strategy is perhaps more appropriate. As we had articulated in our 2008 sector report, the industrial sector is not our choice sector as we see many risk factors. However, corporate development could possibly be a catalyst to MLT’s unit performance. Nevertheless, we emphasize that MLT is meant only for investors with higher-risk appetite and longer investment horizon. We maintain BUY with a fair value of S$1.31.