MLT – OCBC

Riding on Asia’s Acquisition Wave; Maintain Buy

Riding on Asia’s Acquisition Wave. MLT was focusing on inorganic growth for the most part of 2010. The latest acquisition was the Toki Logistics Centre for S$16.2m. Year-to-date, MLT has completed the acquisitions of 11 properties at NPI yields of 7%-9% in Asia after raising S$305m via equity in Sep 10. This was in stark contrast to 2009, where only one acquisition was completed. It now has 93 properties, comprising 51 properties in Singapore, eight in Hong Kong, six in China, 11 in Malaysia, 14 in Japan, two in South Korea and one in Vietnam. Going forward, MLT has stated that it will continue its pipeline of accretive third-party acquisition opportunities in markets such as Japan & Singapore, which offer attractive NPI yields.

Favorable Industrial Outlook. According to DTZ, there is a total of 398m sf of industrial space in Singapore as at 1Q10, with 26.9m sf of new supply expected over the next three years (majority pre-committed). The 3Q10 price and rental indices of industrial space also continued to improve by 8.3% and 4.8% QoQ, respectively. With improved rail connectivity to the suburban regions, we also expect further upside to the industrial buildings situated near the upcoming MRT lines. MLT has some 51% of its net property income (NPI) derived in Singapore. In line with our OVERWEIGHT rating for the Industrial REITs subsector, we think MLT will likewise benefit from positive rental reversions in FY11-FY12. Asia is also expected to lead the industrial recovery due to trade flows and domestic consumption in China (+Hong Kong) and Vietnam, which constitute 25% of MLT’s NPI.

Valuations. MLT is our top most prolific acquirer among its industrial peers YTD. Given the pick-up in industrial space demand and the strengthening of industrial rents, we think MLT looks set to capitalize on the recovery cycle in Asia. The full effect of its announced acquisitions should improve its top-line and DPU contributions by 2011. MLT is trading at a 4% premium-to-book compared to the broader Industrial-REITs which are trading at 8% premium-to-book. We take the view that this premium is understated, considering MLT’s track record in undertaking accretive acquisitions that boost distributable income. Sponsor, Mapletree Investments, and Itochu also plan to develop logistics built-to-suit projects of approx US$300-500m over the next 3-5 years, which will be offered to MLT on a right-of-first refusal basis, further providing MLT with a pipeline of potential assets for future acquisitions. Maintain BUY and we up our RNAV-derived fair value to S$1.00 (19.5% estimated total return).