MLT – CIMB

In acquisition mode

Three properties for S$83.5m

Maintain Neutral. MLT will be acquiring three assets in Singapore, Japan and Vietnam for a total of S$83.5m. Their blended net property yield of 7.9% is above MLT’s existing portfolio yield of 6.2%. DPU accretion is estimated at 0.12ct, or 2% of our FY10 DPU forecast of 6.14cts. We maintain our estimates as we had already assumed S$357m of acquisitions for this year. Our target price of S$0.86 (discount rate 8.6%) based on DDM valuation is intact. Maintain Neutral as we remain cautious on upcoming acquisitions depending on country-specific risks and the possible need for equity which could dilute acquisition yields.

Assets from Vietnam, Japan and Singapore. The three assets are Mapletree Logistics Centre in the Vietnam Singapore Industrial Park, Binh Duong Province, Vietnam; Sendai Centre in Miyagi Prefecture, Japan; and Natural Cool Lifestyle Hub, 29 Tai Seng Avenue, Singapore. Mapletree Logistics Centre and Sendai Centre are to be acquired from MLT’s sponsor. All the assets are fully tenanted with long leases with the exception of Mapletree Logistics Centre in Vietnam whose leases will expire in 1-3 years’ time.

First foray into Vietnam. Mapletree Logistics Centre will be MLT’s first acquisition in Vietnam. Vietnam is an emerging market in Asia which offers a competitive cost structure and a growing middle-class population. Real GDP growth averaged 7.3% from 2005 to 2009, while forecasts for 2010-11 are 6.5%. Vietnam is also attractive to the logistics, manufacturing, retail, information technology and basic materials industries, among others. The Vietnamese government intends to improve infrastructure by investing as much as 10% of GDP on the transport, energy and telecommunication sectors. This is likely to boost demand for logistics services, and warehouse space. We believe the decision to enter this market is also related to the sponsor’s presence there. The sponsor is developing two more projects in Vietnam. The company hopes to acquire these over the next few years.

Comments

Accretive acquisitions. The three acquisitions are rather attractive in terms of yields. The Vietnam acquisition offers the highest net property income (NPI) yield of 10.3%, which is attractive against MLT’s current portfolio NPI yield of 6.2%. However, there could be some near-term risks in renewals with leases expiring over the next 1-3 years. The Japanese property has a high NPI yield of 6.8% vs. MLT’s Japanese portfolio yield of 5%, and an existing 10-year lease that will expire in 2019. The Singapore asset also has an attractive yield of 8.05% vs. the Singapore portfolio yield of 7.1% with a 10-year leaseback arrangement with the vendor, Natural Cool Holdings.

Full debt funding for now; gearing to reach 40%. Due to the small quantum of the acquisitions, MLT will be funding its purchases fully with debt for now. It has sufficient credit lines although it is not clear what the cost of debt will be. The manager estimates that asset leverage will reach 40.2% (from 38.6%) after the acquisition.

Impact on DPU positive though not material. We estimate an incremental DPU of 0.12ct, assuming the properties are held for a full year, and cost of debt of 2.5% (the current portfolio’s cost of debt). This is about 2% of our FY10 DPU forecast of 6.14cts. Although the acquisitions are accretive, the impact on DPU will not be material.

Valuation and recommendation

Maintain Neutral. We maintain our estimates as we had already assumed S$357m of acquisitions for FY10. Blended yields of 7.9% meet our net-yield expectations. We maintain our Neutral rating as risks in a developing market like Vietnam are high particularly with leases expiring in the short term, and MLT could possibly require equity at a later stage, which could dilute its acquisition yields.