MapleTree – CIMB
Starting up acquisitions
Buying assets in Singapore and Japan
Maintain Underperform with DDM target price of S$0.77 (from S$0.75). MLT has announced acquisitions worth S$145m in Singapore and Japan, to be funded partially with debt, and partially with equity proceeds from a private placement. After factoring in the changes, our DPU forecast for FY09-11 changes -3% to +3%. We maintain Underperform as warehouse properties tend to have more limited scope for higher
rental reversions compared with the other asset types. We are also concerned that there could be more non-accretive acquisitions bundled together with moderately accretive ones in the near future.
Acquisitions a mixed bag. MLT is acquiring two assets in Singapore and one in Japan for a total of S$145m. All three deals will come with long leases of 5-8 years. The Singapore assets come with built-in rental increases of 2% p.a. We view the Singapore assets positively for their net property income (NPI) yields of more than 9%, which are above MLT’s annualised YTD portfolio yield of 6.3%. NPI yields for the
Japanese property have not been announced. However, at a collective EBITDA yield of 8.4% for the three assets, we infer that NPI yields for the Japanese property are likely to be 6.3%, non-accretive to the portfolio.
Weighted average lease expiry (WALE) increases to five years from 4.9 years. After the acquisition, MLT’s WALE based on gross revenue will increase to five years from 4.9 years, increasing its portfolio stability.
Singapore assets funded by equity; Japanese properties by debt
Private placement to raise S$79.4m, diluting share base by 6%. MLT has successfully placed 115m new units in a private placement this morning. This will dilute its share base by 6%. The price of the new units is S$0.69. This represents a 5.6% discount to the VWAP of S$0.731 per unit for trades in MLT’s units on 6 Nov 09. Citigroup is the sole bookrunner. The new units will raise gross proceeds of S$79.4m.
S$80m equity injection implies S$200m of acquisitions. Assuming MLT resorts to 60:40 debt to equity for its acquisitions, it can potentially make acquisitions to the tune of S$200m, based on S$80m of gross proceeds. Some of the debt headroom made available after the private placement will be used to fund the Japanese property. We anticipate another S$55m of acquisitions for FY10, assuming that MLT will make a
total of S$200m of transactions.
Asset leverage still below 40%. After the completion of the three acquisitions, MLT estimates its asset leverage at 38.5%, incrementally higher than its 38.1% leverage as at 30 Sep 09. We believe management will not be so ready to gear up beyond 45% in the near future after its painful refinancing in 2008.
Valuation and recommendation
Changes in assumptions. We factor in: 1) the three acquisitions at a total of S$145m at net property yields of 8.4%, with revenue contributions coming in only in FY10; 2) an additional S$55m of acquisitions in FY10 with 75% revenue contributions at 8.4% NPI yields; and 3) 1% growth in the portfolio from zero earlier, incorporating effects from built-in rental escalation as well as possibly higher rental reversions.
Impact of changes. After our changes, our DPU forecast for FY09 falls 3% from dilution. However, our DPU forecasts rise by 1% for FY10 and 3% for FY11 as the new assets start contributing. Our DDM-derived target price (discount rate 8.6%) rises to S$0.77 from S$0.75. At the rights offer price of S$0.69, dividend yield in FY10 should be 8.6%, above the FY10 diluted yield of 8%. This is still rather attractive.
Maintain Underperform. We are unexcited about the deals as the combined effect of equity issuance with the acquisitions would only be marginally accretive. Warehouse properties tend to have more limited scope for higher rental reversions compared with the other asset types, all things being equal. This explains management’s eagerness to revert to its “growth by acquisition” strategy.
However, as market NPI yields are not much higher than MLT’s current dividend yield of 8%, we are concerned that there could be more non-accretive acquisitions bundled with moderately accretive ones in the near future, due to the difficulty of finding sufficient sizeable acquisitions (as the quantum for a single warehouse property is relatively small) and growing competition for industrial properties from more institutional buyers returning to the market.