MLT – CIMB

Temporary occupancy weakness

• In line; maintain Neutral. 1H10 DPU of 3cts met Street and our expectations, forming 49% of our full-year estimate. Despite lower revenue from increased vacancy rates in Malaysia, Hong Kong and Singapore, 1H10 distributable profit grew 7.8% yoy, lifted by lower property expenses, lower borrowing costs, and the partial hedging of cash flows from Hong Kong and Japan. We maintain our estimates and DDM-based target price of S$0.86 (discount rate 8.6%) as we have already assumed moderate rental growth of 2% and S$357m worth of acquisitions for this year (of which S$186m has been realised). MLT offers dividend yields of 6.9% for FY10. We expect re-rating catalysts from announcements of accretive acquisitions, development work and any refinancing on improved credit terms in the near term.

• Net property income (NPI) flat qoq. 2Q10 NPI of S$45.8m was flat qoq as lower occupancy in Singapore, Hong Kong, Malaysian and Chinese was ameliorated by lower maintenance expenses and one-off provisions for doubtful debt in 2009. The partial hedging of Hong Kong and Japanese cash flows also supported distributable income despite currency losses against the strengthening S$.

• Portfolio occupancy of 97% as at Jun 10, down from 98% in Mar 10. Regions with declining occupancy were Malaysia (-5% pts); Hong Kong (-3% pts), Singapore (-1% pt) and China (-1% pt). Management attributed the shortfall in Malaysia (two properties) and Singapore (one) to conversion from single-user assets to multitenanted buildings in an attempt to lift rents further as leases expired in the quarter. Particularly for the two Malaysian assets, pre-commitments from new tenants would have lifted occupancy to 97-98%. The fall in Hong Kong’s occupancy was blamed on the departure of key tenant, Lane Crawford, when its lease expired. Management is confident of finding replacement tenants at positive reversions over preceding rents.