MLT – CIMB

Nearing acquisition catalysts

• Results in line; upgrade to Neutral from Underperform. 1Q10 DPU of 1.5cts met Street and our expectations, forming 27% of our estimate. Distributable profit grew 8% yoy on tight cost control and lower borrowing costs. We raise our acquisition assumptions in view of management’s historical strong pursuit of growth via acquisitions, as well as higher new net property income margin and lower interest expense assumptions. Our DPU estimates increase by 9-12% for FY10-12. Our DDM-based target price (discount rate 8.6%) rises accordingly to S$0.86 (from S$0.74). MLT offers forward dividend yields of 7%. We upgrade it to Neutral in view of an improving outlook for industrialists. Re-rating stock catalysts could include announcements of acquisitions and development work in the near term, we believe.

• Second quarter of improving net property income (NPI). We were impressed with MLT’s tight cost control of property-related expenses which drifted down 4% qoq and 21% yoy. As a result, NPI of S$45.8m represented the second sequential quarter of improvement (+2% qoq). Portfolio occupancy was stable at 98%. On a quarter comparison basis, both distributable profit and DPU had declined due to a one-off contribution from the extension of leases at 201 Keppel Road in 4Q09.

• Expect acquisitions and BTS in near term. Management is closely looking at the acquisition of assets developed by its sponsor, Mapletree Investments. These acquisitions could take place in China, Vietnam or Malaysia. MLT’s portfolio cap rates are 8-9% in these countries and we expect properties to be acquired at such levels. Separately, MLT is exploring build-to-suit (BTS) properties with end-users. We believe announcements for acquisitions and BTS projects could come by 1H10 as the recent compression in its dividend yields makes yield-accretive acquisitions likely in the near term. Nonetheless, we are cautious on the attractiveness of upcoming acquisitions, depending on: 1) country-specific risks; and 2) the need for equity which would dilute acquisition yields.

• Changes in assumptions. Given management’s historical strong ambitions in growth via acquisitions and improving industrial indicators, we have increased our acquisition assumption to S$357m in 2010 (from S$157m), 60:40 funded by debt:equity. Separately, we increase our NPI margin assumptions to 89% (from 87.5%) and lower our cost-of-debt assumption to 2.5% (from 3%).