3Q09 results – flat-lining – ALERT

• Mapletree announced 3Q09 results, with DPU of S$0.0148/unit, flat Q/Q but higher than J.P. Morgan estimates on the back of tax savings as a result of government tax rebates in Malaysia and China. Gearing for the trust as of 30 Sep 09 is 38.1%, book value stood at S$0.88/unit. Stock will trade ex-3Q09 distribution on 28 Oct 09.

• Operations still under pressure: Net property income declined 3.5% Q/Q as a result of depreciation of the HK$ and Rmb, an increase in vacancy rates in Hong Kong and China assets, and a pre-termination of a lease in Singapore. The occupancy rate declined 1.2% Q/Q, with the average reversion rate flat compared to previous prevailing rentals due to the trust’s priority in retaining tenants. We expect 4Q09 results to flat-line at best.

• No change to trust’s strategy: Management reiterated its “yield +growth” strategy during the conference call and indicated that it was in an advance stage of evaluating accretive third-party acquisition opportunities in Singapore, Japan, and Hong Kong. Funding for potential acquisitions will still be through a mix of debt and equity. In addition, management highlighted that approximately S$300 million of the sponsor’s development pipeline has been completed or is nearing completion, and the trust will tap into the pipeline when appropriate.

• Management execution is the key to share price performance: The trust has this year moved to a “new strategy”, in which management will try to bundle acquisitions together with permanent/stable funding structure being put in place at the same time. While we believe this is the right shift in strategy for MLT, it is difficult in execution given the much smaller deal size for logistic assets. A demonstration of a good execution of equity fund raisings together with yield-accretive acquisitions would be necessary, in our view, before the stock could rerate. We therefore maintain our Neutral rating on the stock.

MapletreeLog looking to buy assets in Asia

MAPLETREE Logistics Trust (MapletreeLog) is in advanced talks to buy assets in Asia, as its business outlook improves.

MAPLETREE Logistics Trust (MapletreeLog) is in advanced talks to buy assets in Asia, as its business outlook improves.

It said this yesterday as it reported a net property income of $44.1 million for the third quarter ended Sept 30 – 9.5 per cent higher than a year ago.

‘We are in a position to consider some growth in line with our ‘yield plus growth’ strategy,’ said Chua Tiow Chye, CEO of trust manager Mapletree Logistics Trust Management. ‘With less competition from buyers in the region, we believe sellers will be less demanding in terms of asking prices and cap rates for disposing of their properties.’

For instance, MapletreeLog believes that deals commanding a capitalisation rate of about 9 per cent in Singapore are possible.

It emphasised that the acquisitions will be accretive, and will not lead to significant movement in its gearing. It will fund purchases through a mix of debt and equity, and capital from any equity fund-raising exercise will not go towards recapitalisation.

As at Sept 30, MapletreeLog’s aggregate leverage ratio was 38.1 per cent, slightly higher than the 37.8 per cent three months previously. It says it faces no refinancing risk this year; it has $19 million of working capital loans due for renewal in Q4, which can be covered by committed revolving credit facilities.

MapletreeLog’s amount distributable in Q3 was $28.8 million, reflecting an increase of 13.2 per cent over the same period last year.

Nevertheless, available distribution per unit (DPU) fell because of the larger unit base from a rights issue in August last year. The DPU in Q3 was 1.48 cents, 19.6 per cent less than the 1.84 cents a year ago.

Adjusting for the rights issue, the proforma DPU in Q3 last year would have been 1.31 cents, translating to a year-on-year growth of 13 per cent.

The occupancy rate across MapletreeLog’s portfolio dipped from 98.3 per cent in June to 97.1 per cent as at Sept 30. But ‘while the environment remains challenging, we expect pressure on occupancy and rental rates to ease a little with the improving outlook’, said Mr Chua.

The counter closed unchanged yesterday at 75 cents.

Attractive yields

At a Glance

• In line with ours, above consensus
• Stable portfolio occupancies
• Maintain BUY, TP S$0.83, offering a total return of 18% backed by stable FY09-10F DPU yields of 8%.

Comment on Results

Stable 3Q09. Mapletree Logistics Trust (MLT) reported 3Q09 results that were in line with expectations. Gross revenues and net property income (NPI) increased by 10.3% and 9.5% to S$50.8m and 44.1m respectively, as a result of a larger portfolio. Distributable income came in at 28.8m (+13% yoy), translating to a DPU of 1.48 Scts. On a q-o-q basis, performance remained stable.

Occupancy levels at 97%. Occupancy levels held up pretty well, which were slightly above our estimates of 96%. Looking ahead, with only 4% of their revenues up for renewal in 2H09, we expect occupancy levels to remain stable – we have tweaked our occupancy assumptions for FY09 slightly upwards, which increase our FY09-10F DPU estimates slightly 2%.

Selectively acquisition. The manager of MLT emphasizes that while they are considering potential targets, they will only likely go ahead with the acquisitions, only if they are accretive and value enhancing to the portfolio. Also, these acquisitions should not be overleveraging its balance sheet, which, in our view, is reassuring to investors of management’s cautious and prudent approach towards growing its portfolio.

Recommendation

Buy for stable yields, TP S$0.83. We believe that MLT, trading at 0.8x P/BV, offering with a prospective forward FY09-10F DPU yield of 7.8% remains attractive. Maintain BUY, TP S$0.83 on the on the back of higher earnings estimates and lower WACC of 6.6% compared to 7%. Upside surprises will stem from MLT acquiring properties from market/sponsor.

No surprises

• Downgrade to Underperform from Neutral; but target price raised to S$0.75 (from S$0.68). We downgrade to Underperform despite results meeting our expectations as share price has run, leaving limited upside near-term upside.

• 3Q09 results in line. 3Q09 results were in line with consensus and our expectations. YTD DPU of 4.44cts forms 79% of our full-year forecast. Distributable profit of S$28.8m grew 13.2% yoy with full contributions from 81 properties vs. 76 properties a year ago. However, DPU shrank 22.6% yoy due to additional units issued in a rights issue in Aug 08.

• Portfolio occupancy stable at 97%. Occupancy slid 1.2% pts qoq to 97.1%. To date, the manager has renewed 80% of the leases expiring this year.

• Expect growth via acquisitions soon. The manager is ready to acquire again. With less competition from buyers in the region, it believes that sellers will be less demanding. Deals at about 9% cap rates in Singapore are possible, and at about 200-250bp above the valuation of MLT’s properties as at 31 Dec 08. It is currently in advanced negotiations for some deals, and plans to fund acquisitions with debt and equity. Taking into account the redemption of a S$60m medium-term note on 19 Oct, MLT’s asset leverage could be 38.1%, giving it debt headroom of about S$380m, assuming a gearing of 45%.

• Changes to assumptions. We reduce our cost-of-debt assumptions in view of lower-than-forecast interest expenses YTD. Our DPU estimates rise by 5-6% for FY09-11. We also roll forward our DDM-based valuation (discount rate 8.6%), which produces a higher target price of S$0.75 (from S$0.68). We have not factored in acquisitions due to a lack of clarity on their timing and size. Without acquisitions, MLT is likely to have limited growth potential. With acquisitions, even DPU-accretive ones, its NAV could be diluted, particularly if equity were issued below NAV.