MapleTree – CIMB

Taking the bitter medicine

MLT proposes renounceable rights issue

Seeking S$606.7m through rights issue. MLT held a briefing last evening to clarify its rights issuance announced last week. In a nutshell, MLT will be seeking unitholders’ approval at an EGM on 18 Jul for its proposal to issue 831.1m rights at S$0.73 apiece. This would raise funds of S$606.7m, assuming full take-up. The funds would be used for the acquisition of 12 properties and the extension of one property that were announced last year, partial debt repayment and corporate and working-capital uses. Sponsor Mapletree Investments Pte Ltd has undertaken to vote in favour of the rights issue and subscribe for its 30.16% entitlement. It also has an option to subscribe for excess units. Any remaining rights not taken up by the sponsor will be underwritten by DBS, Goldman Sachs, Macquarie Capital and UBS.

More opportunities to acquire at improved yields. Management guided that growth in the Asian logistics industry and demand for logistics space in the region remain strong. As a result of the credit crunch, sellers are now more relenting in their asking prices, resulting in moderately improved yields. Management also indicated that the company will continue to grow via acquisitions. However, it will be more conscious of keeping gearing levels to a lower 45-50%.

Comments

Gearing down to 38%. Assuming full take-up of the 831.1m rights, the S$606.7m raised will repay part of the debt taken to acquire the 12 properties and extend one property. Management guided that short-term debt from Singapore, Hong Kong and Malaysia is likely to be paid down. Gearing could fall from 55% to 38%, inclusive of the properties, giving MLT more financial flexibility to acquire when opportunities arise.

Immediate dilution. Assuming full take-up, the share base will enlarge from 1,108.2m units as at end-FY07 to 1,939.3m units. Our earlier DPU forecast of 6.9cts for FY08 will fall to 5.44cts after dilution, yielding 6.4%.

Valuation and recommendation

Downgrade to Neutral from Outperform; target price reduced to S$1.00 from S$1.36. We have cut our DPU estimates by 20-22% to account for dilution from the rights issue. Additionally, we are assuming an improved acquisition yield of 7% over the 6% used earlier. Our discount rate has also been raised from 6.7% to 8.0% from a high risk-free rate of 5.4% and an equity premium of 4.0%, in line with house guidelines. Accordingly, our DDM-derived target price has been lowered to S$1.00.

We see the proposed rights issue as a bitter pill that needs to be taken at some stage in order for MLT to come out of its high gearing, and move forward. MLT’s fundamentals of a quality portfolio, long leases (average lease term to expiry is 5.7 years), high occupancy rate of 99.6% and reputable tenants remain. Nonetheless, a slowdown in acquisitions this year and an expected increase in cost of debt may imply that ML is not likely to see much price catalyst in the near term.