MLT – CIMB

No surprises

• Downgrade to Underperform from Neutral; but target price raised to S$0.75 (from S$0.68). We downgrade to Underperform despite results meeting our expectations as share price has run, leaving limited upside near-term upside.

• 3Q09 results in line. 3Q09 results were in line with consensus and our expectations. YTD DPU of 4.44cts forms 79% of our full-year forecast. Distributable profit of S$28.8m grew 13.2% yoy with full contributions from 81 properties vs. 76 properties a year ago. However, DPU shrank 22.6% yoy due to additional units issued in a rights issue in Aug 08.

• Portfolio occupancy stable at 97%. Occupancy slid 1.2% pts qoq to 97.1%. To date, the manager has renewed 80% of the leases expiring this year.

• Expect growth via acquisitions soon. The manager is ready to acquire again. With less competition from buyers in the region, it believes that sellers will be less demanding. Deals at about 9% cap rates in Singapore are possible, and at about 200-250bp above the valuation of MLT’s properties as at 31 Dec 08. It is currently in advanced negotiations for some deals, and plans to fund acquisitions with debt and equity. Taking into account the redemption of a S$60m medium-term note on 19 Oct, MLT’s asset leverage could be 38.1%, giving it debt headroom of about S$380m, assuming a gearing of 45%.

• Changes to assumptions. We reduce our cost-of-debt assumptions in view of lower-than-forecast interest expenses YTD. Our DPU estimates rise by 5-6% for FY09-11. We also roll forward our DDM-based valuation (discount rate 8.6%), which produces a higher target price of S$0.75 (from S$0.68). We have not factored in acquisitions due to a lack of clarity on their timing and size. Without acquisitions, MLT is likely to have limited growth potential. With acquisitions, even DPU-accretive ones, its NAV could be diluted, particularly if equity were issued below NAV.