MLT – CIMB

Positives priced in

2Q displayed sustained stability, a hallmark of MLT's long-tenured logistics portfolio. But we believe the current environment of elevated asset values could throw a spanner in the works for MLT's asset hunt, a key source of growth and share price outperformance.

2Q/1HFY13 DPU met street and our estimates at 24%/48% of our FY13 forecast. We had factored in S$150m in acquisitions. We lower DPUs on reduced acquisition yields and timing. But our DDM target price is raised on a lower discount rate of 7.3% (prev. 8.6%). Downgrade to Neutral from Outperform on valuations.

Sustained stability

2Q displayed the sustained stability characteristics of MLT's long-tenured portfolio. 2Q DPU was up 1.2% yoy (3.0% excluding 2Q12's one-off gain) as a 15% NPI increase (from acquisitions and developments) was partially offset by higher funding costs. Leasing remained stable: Occupancy rose to 99.2% from 99.0%. Rental reversion remained positive at 8%, though it could have been a stronger 16% if not for distortion from the conversion of a hybrid lease in Singapore to triple-net basis.

But getting harder to find growth

Acquisitions and developments are the key sources of growth for MLT's portfolio. But we think that the current environment of elevated capital values could make this difficult. Excluding our assumed S$150m in acquisitions, FY14 DPU growth would have been a more muted <2% vs. our current 5%. Management has proactively engaged in advanced negotiations with a major Japanese third-party logistics service provider for a BTS development at Iwatsuki Centre, which was destroyed by a fire in 2011, though this is unlikely to be a major game-changer, in our view.

Downgrade to Neutral

MLT has outperformed the STI by 28% in the past year. We believe that current valuation at 1.3x P/BV and forward yields of 6.0-6.4% have priced in its portfolio stability. While acquisitions will likely be accretive against cheap funding costs, competition and elevated asset values should make attractive finds difficult.