MLT – OCBC

Capital Recycle Play kick-started

Strategic divestment of older assets… Mapletree Logistics Trust (MLT) recently announced that a local IT solutions company and CK Holdings have exercised their purchase options on 8 Apr for two MLT properties – 9 and 39 Tampines Street 92 at a purchase consideration of S$12.8m and S$14.7m, respectively. A total net disposal gain of S$2.1m is expected from the divestment. MLT cited that the two properties have building specifications that are now outdated and no longer ideal for modern logistics operations. Given its limited growth potential, it believes that divesting these assets would be the best option to maximise returns. MLT expects the disposal gain to result in a one-time increase in FY11 DPU by 0.07-0.09 S cents.

… to fund better-yielding Acquisitions. The net proceeds (after deducting the net disposal gain distributable to unitholders) will be deployed to fund MLT’s recent S$24.5m acquisition of Jian Huang Building (JHB), which is a five-storey warehouse-cum-office building located at 15A Tuas Avenue 18. Under the sale-and-leaseback arrangement, JHB will be leased to Jian Huang Engineering for a period of seven years with an annual built-in rental escalation of 2% and a sevenyear extension option. The two-year old property provides an initial NPI yield of 8.2% and has a remaining land lease of about 27 years. In addition, MLT also made its first acquisition for FY2011 on 25 Mar with the purchase of Hiroshima Centre, Japan for S$114.2m (debt-funded). The total GFA is about 43,600 sqm, making it a major logistics facility in the Hiroshima prefecture of Chugoku region. The acquisition provides only an initial yield of 7%, but MLT believes there is further scope for organic growth, since it has not yet reached its maximum permissible plot ratio of 45,000 sqm. Despite our concern of greater exposure in Japan, MLT reiterated that the acquisition is in line with its “Follow-the-Client” strategy and its aim to grow the portfolio through repeat customers. Hiroshima Centre is currently leased to Nippon Access Group which is an existing MLT customer, taking up approximately 87,700 sqm of space. With this acquisition, Nippon Access will take up approximately 131,300 sqm of space and contribute towards 4.3% of MLT’s gross revenue.

Still compelling but Japan woes remains. MLT has a proven track record of executing a virtuous cycle of accretive acquisitions and competitive fund-raising. We take delight that it is also starting to recycle proceeds into better-yielding assets. However, we remain wary of Japan’s woes and increased the country risk premium to 75 bp for its Japan assets in our valuation. Maintain BUY with a reduced RNAVderived fair value of S$1.01 (prev: S$1.03).