Factoring in acquisition growth beyond 2010

• Upgrade to Outperform from Neutral; target price raised to S$1.01 (from S$0.89). We see improved demand for logistics space in MLT’s key markets and are more assured of positive rental renewals for the rest of 2010. With a strong S$1bn acquisition pipeline from its sponsor, and capabilities to take up high-yielding development projects, MLT’s aggressive growth plans are ready to take full flight. We assume S$1bn of acquisitions for 2011-12, partially funded with equity. Our DPU estimate dips 2% for 2010 before rising 6-9% for 2011-12, reflecting our changes. Our DDM target price rises accordingly to S$1.01 from S$0.89 (discount rate 8.6%). MLT offers a prospective dividend yield of 7.2% and price upside potential of 20%. Upgrade to Outperform in anticipation of acquisition catalysts beyond 2010.

• Lease renewals more assured with demand surge in key markets. There has been a strong recovery in warehousing demand in MLT’s two key markets, Singapore and Hong Kong, so far this year, propelled by a manufacturing surge and improvements in external trade, auguring well for MLT’s lease renewals in FY10.

• Higher yielding build-to-suit (BTS) development projects to further fuel growth. Within a development cap of 10% of deposited properties, MLT is able to undertake about S$300m worth of projects, in our estimation.

Strengthening foothold in Korea with second acquisition

MLT has agreed to acquire Multi-Q Centre in South Korea for KRW 28bn (S $32m). The property comprises 2 blocks of warehouses with total GFA of 308,924 sf located in Gyeonggi-do, a well established logistics cluster. Vendor Multi-Q Logistics will lease back the asset for 5 years with annual rental escalations. The acquisition is expected to complete by end 3Q10 and will bring gearing up to 44.2% assuming fully debt funded.

Yield accretive; 7th in a string of acquisitions. This is MLT's second acquisition in South Korea since 2008 and the 7th since Dec last year, bringing total acquisitions YTD to around S$460m, out of which S$260m have been completed. The acquisition is yield accretive with initial yield of >9% compared to the implied yield of 7.7% for its existing property in Korea. The property also has unutilized plot ratio which can add an additional GFA of around 40,903sf when utilized, subject to approval. Upon completion, this will enlarge MLT's portfolio size to S$3.3bn, further diversify its portfolio and enhance its growth profile.

Minor DPU accretion; maintain Buy with TP of S$0.95. No pro-forma DPU accretion or definite financing method was provided. We estimate a minor 0.5% boost to FY11-12 DPU and DDM assuming 60:40 equity/debt. With gearing of 44.2%, the highest in the sector and nearing its optimal gearing of 45%, we think an equity raising is likely in the near term especially if acquisitions continue at the current pace. We maintain Buy with valuations attractive at FY11e yield of 7.4% and 1.0x P/B.

MapletreeLog acquires second Korean warehouse

MAPLETREE Logistics Trust (MapletreeLog) is investing $32 million to buy a second warehouse in South Korea.

The company yesterday announced it has signed a conditional sale and purchase agreement with the property’s vendor Multi-Q Logistics.

The purchase consideration is 28 billion won or around $32 million Singapore dollars. This deal is expected to be completed at the end of the current quarter.

If the acquisition is fully funded by debt, MapletreeLog’s gearing level will increase to 44.2 per cent. the firm said.

The company’s latest buy is made up of two blocks of warehouses in South Korea’s Gyeonggi-do province.

The first block is a three-storey warehouse and office facility with a gross floor area (GFA) of around 20,800 square metres (sq m).

The second is a four-storey warehouse with ancillary cold storage facilities. Its GFA is 7,900 sq m, the firm said in a statement.

Under the deal, Multi-Q Logistics will lease back the property for five years at rental prices that provide for annual escalation.

‘Aside from its attractive net property yield, the property has unutilised plot ratio which can add an additional GFA of about 3,800 sq m when utilised. This acquisition continues our building of a stronger foothold in South Korea,’ said MapletreeLog’s chief executive Richard Lai.

This firm’s second acquisition in Korea is also its seventh regional buy since December last year.

To date, MapletreeLog has announced $460 million worth of acquisitions and some $260 million of these have been completed.

Takes 3 in Japan

• Buying 3 Japanese properties for cS$200m

• Yield accretive at 7.3%, above current Japanese portfolio yield of 5.0%

• Gearing at 43%, future acquisitions to be funded through debt/equity

• BUY, TP raised to S$1.00.

Growing its Japanese exposure. Mapletree Logistics Trust (“MLT”) announced the acquisition of 3 Japanese properties for a total consideration of S$200m. Completion of this deal will increase revenue contribution from Japan to 23.7% (from 17.8% currently).

Yield accretive at 7.3%, secured long-term leases. The underlying end users are understood to be major local logistics players in Japan. The assets are signed on long-term 10-year fixed leases, adding to MLT’s earnings visibility and sustainability. The acquisitions will lift MLT’s average lease expiry to 5.0 years from 4.8 years currently. We include these assets in our numbers, raising our FY11F DPU by c3%.

Gearing to head up to 43%, further acquisitions could see equity fund raisings. Gearing post acquisition is expected to head up to c43%, still within the manger’s comfortable range of 40-45%. However, any further acquisitions, which we believe are likely, would be part-funded through new equity. We have assumed further acquisitions of S$100m funded by a 40/60 debt-equity ratio.

Maintain BUY, raised TP to S$1.00. MLT continues to offer attractive and stable FY10-11F yield of 7.0-7.7%. Catalysts for further re-rating will hinge on the trust acquiring more assets and growing its earnings.

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.