MLT – Daiwa

A more challenging environment for acquisitions

3 (Hold) rating maintained

• We maintain our 3 (Hold) rating. MLT’s acquisition-growth strategy resumed in late-2009 when it picked up three assets, financed partly with a S$79m placement. After the acquisition announcement of another three assets for S$83.5m on 31 May 2010, which would take its leverage ratio above 40%, according to MLT’s estimates, we believe MLT’s equity-fundraising risk has risen.

• Moreover, unlike the heady capital-market conditions from mid-2005 to the end of 2007, MLT’s DPU yield is not low, and combined with a more cautious debt market, the DPU-accretion from recent acquisitions has not been compelling, in our view. We note that this situation is not unique to MLT and appears commonplace among the S-REITs following the financial crisis.

RNG valuation-derived target price of S$0.87

• Our six-month target price, based on parity with our RNG valuation (a finite-life Gordon Growth model) is S$0.87, on a par with its NAV as at 31 March 2010. Our valuation assumes a weighted (blended) cap rate of 6.9% for its investment-property portfolio and a blended cost of debt of 3.3%.

Major risk factor: another market disruption

• MLT’s acquisition-growth model depends on well-functioning capital markets and could stall again with a stock-market correction or other dislocation. MLT’s underlying organic growth of low single-digit percentages year-on-year (for DPU, based on our forecasts) appears pedestrian, in our view.