MLT – CIMB

Strengthening foothold in Japan

Three more Japanese logistics centres in the bag

Maintain Neutral; target price raised to S$0.89 from S$0.86. MLT announced that it has entered into a binding MOU to acquire three Japanese logistics centres located in the Kanto region of Greater Tokyo for S$200m and an initial net yield of 7.3%. MLT’s acquisitions this year total S$386m, exceeding our forecast of S$357m. We increase our acquisition assumption by S$114 to a total of S$500m for this year, though we continue to assume that there would be some equity issuance for sizeable acquisitions after this as gearing (43.6% after the acquisition) threatens to cross management’s comfort threshold of 45%. Our FY10-12 DPU estimates increase by 2-3% and our DDM-based target price rises accordingly to S$0.89 from S$0.86 (discount rate 8.6%). However, we foresee that organic growth potential will be limited while significantly accretive acquisitions might be difficult to come by given its large portfolio size. Maintain Neutral. We expect re-rating catalysts from announcements of more sizeable accretive deals and positive rental reversions after converting single-user buildings to multi-user ones.

Purchase consideration of S$200m (¥13bn) for three assets. The vendor of the three assets is Kabushiki Kaisha A-Max, a logistics facility development and management company. Initial net property yields are 7.3% for a single net lease structure (net of maintenance expense). However, we anticipate that net yields to MLT would be watered down to about 5.4% after a 20% Japanese withholding tax. This is moderately more attractive than yields from its existing Japanese portfolio of 5%. After this acquisition, management expects asset leverage to rise to 43.6%

Long lease term. The three assets have been 100% leased for the next 8-10 years. Two of the properties, Iwatsuki Logistics Centre and Iruma Logistics Centre, have remaining 8-year leases with a major 3PL logistics player Oji Transportation; while Noda Logistics Centre will be leased to Izu Express Trucking, a logistics service provider, on a fresh 10-year lease.

Valuation and recommendation

Increasing our acquisition assumptions. Earlier, we had assumed S$357m of acquisitions for FY10. Our assumption has been exceeded by S$29m after this acquisition. In view of the manager’s ambition to ramp up acquisitions, we raise our acquisition assumption by S$143 to a total of S$500m for this year. We continue to believe that there will be some equity issuance for sizeable acquisitions after this as gearing threatens to cross management’s comfort threshold of 45%. Our DPU estimates increase by 2-3% for FY10-12 after the change and our DDM-based target price rises accordingly to S$0.89 from S$0.86 (discount rate 8.6%). We believe that distribution from MLT will remain stable with increased contributions from a stable market like Japan. However, we foresee that organic growth potential will be limited

while significantly accretive acquisitions might be difficult to come by given its large portfolio size. Maintain Neutral.