Acquisitions to drive earnings

• Resilient 3Q15 results
  
• Meaningful acquisition prospects in medium term
  
• Downgrade to HOLD, TP S$1.27
  

3Q15 results in line. Mapletree Logistics Trust (MLT) continued to deliver a sustainable set of results in 3Q15. Revenues and net property income came in at S$82.9 m (6% y-o-y, 2% q-o-q) and S$62.5m ( 3% y-o-y, 1% q-o-q). The stronger performance was mainly due to contribution from the acquisitions of six properties and positive rental reversions of c.9% which more than offset (i) the lower portfolio occupancy rates (c.96.9% vs 97.2% in 2Q15) due to newly converted multi-tenanted properties, and (ii) loss of income from 5B Toh Guan road as it undergoes AEI. Distributable income grew 3% y-o-y to S$46.2m, translating into a DPU of 1.87 Scts. YTD DPU of 5.65 Scts forms 75% of our forecast.

Moderating prospects dampened by conversions of singleuser properties. Faced with a competitive operating outlook, MLT has done well in managing its leases and maintaining a high occupancy rate of c.96.9% with average reversions of 9.0%. Looking ahead, we expect downward pressure on occupancies from (i) downtime due to further conversions of multi-tenanted properties (estimated that half of the 16 single-tenanted properties will be converted) to increase inFY16 across its major markets. Rental reversions are expected to further moderate owing to heighted supply completions. In terms of inorganic growth, pipeline from sponsor remains highly visible but we note that meaningful growth is likely to come only in the medium term. In the meantime, MLT might look at recycling its assets through divestments to maximise value and redeploy proceeds to higher yielding assets.

Downgrade to HOLD on valuations, TP of S$1.27 as we roll forward valuations. We believe that at a P/Bk NAV of 1.3x, a forward yield of 6.1-6.4% reflectsinvestors’ high confidence in MLT’s earnings resilience and management execution ability on growth. However, it is near our revised TP of S$1.27 as we roll forward valuations. Given limited upside to our price objective, we downgrade our call to HOLD.

Drag from lease conversions

• 3QFY15 DPU inched up 1.6% YoY
  
• Positive rental reversions of 9%
  
• Outlook still muted
  

3QFY15 results within expectations

Mapletree Logistics Trust (MLT) reported a mild 1.6% YoY growth in its 3QFY15 DPU to 1.87 S cents on the back of a 6.2% increase in its gross revenue to S$82.9m. Topline growth was driven by contributions from six acquisitions in China, Singapore, Malaysia and Korea, the Mapletree Benoi Logistics Hub redevelopment project, and higher revenue from existing assets in Singapore, Malaysia and Hong Kong. These were partially offset by lower occupancy at several of its newly converted multi-tenanted buildings (MTBs) in Singapore. For 9MFY15, revenue grew 6.4% to S$245.4m and DPU rose 3.5% to 5.65 S cents. The former and latter constituted 74.6% and 74.1% of our FY15 forecasts, respectively. This was within our expectations.

Some pressure on occupancy rates

MLT’s portfolio occupancy eased 0.3 ppt QoQ to 96.9% (as at end 3QFY15), its fifth consecutive quarter of sequential decline. The drag came largely from its Singapore assets, which experienced downtime due to the conversion of single-user assets (SUAs) to MTBs. Management would focus on tenant retention during this challenging period. As at 31 Dec 2014, MLT’s leverage ratio stood at 34.7%, while ~76% of its total debt have been hedged or are on a fixed rate basis.

Headwinds to persist in the near-term

MLT managed to achieve positive average rental reversions of 9% for leases renewed in 3QFY15, but we believe the outlook remains challenging, especially in Singapore. We see headwinds ahead as 16 of its SUAs have leases which are expiring in FY16 (9.5% of NLA and 9%-10% of gross revenue). Approximately half of these leases are expected to be converted into MTBs, which would result in further downtime and pressure on margins and occupancy rates. Management is seeking to mitigate this by exploring acquisition and divestment opportunities, with net gains from divestments to be distributed back to unitholders. Maintain HOLD on MLT, with an unchanged fair value estimate of S$1.12. We believe valuations are rich, with the stock trading at FY15F P/B of 1.3x, following a 4.2% appreciation in its share price YTD

Needs More Injections From Sponsor

Mapletree’s 2Q15/1H15 distribution per unit (DPU) rose 3.3%/4.4% YoY to 1.88/3.78 cents, or at 25/51% of our full-year forecast. In Singapore, the leasing environment has become more challenging due to tighter regulations on the use of industrial space, such as recent changes that were made to JTC Corp’s subletting policy. Without further sponsor injections, we believe its growth prospects are unexciting. Assume

coverage with NEUTRAL and a SGD1.22 DDM-based TP (1.7% upside).

• 2QFY15/1HFY15 (Mar) results in line. Mapletree Logistics Trust (Mapletree) posted a 3.3%/4.4% YoY rise in 2QFY15/1HFY15 DPU, meeting 25%/51% of our full-year estimate, aided by contributions from Mapletree Benoi Logistics Hub and 9% positive rental reversions mainly from Hong Kong, Singapore and Malaysia. The REIT has about 8.8% of its leases (in terms of net leasable area (NLA)) due for renewal for the rest of FY15. The all-in-financing cost for 2QFY15 remained unchanged QoQ at 2.0%, with an average term of debt of 3.3 years (1QFY15: 3.4 years). According to its interest rate sensitivity analysis, its DPU would decline by ~0.5%, or 0.009 SG cents each quarter as a result of a 25bps increase in interest rates.
  
• Portfolio remains robust. Its portfolio occupancy rate stayed healthy at 97.2%, with some downtime due to the conversion of single-user assets to multi-tenanted buildings. Leasing activities remained stable in most of Mapletree’s markets, with some weakness in China – although this was offset by stronger performances in Singapore and HK. We note that reversions have also slowed to 9% last quarter from a high of 24% a year ago. Net property income margins are also on the decline, dropping to 84.2% in 2QFY15 from 86.4% in 2QFY14.
  
• Rekindling its growth engine. We forecast that Mapletree’s DPU could grow at an unexciting CAGR of 1.4% over FY14-17F. This, however, could be boosted by further asset injections by its sponsor, which has 17 more sizeable logistics developments in Asia, representing more than half of the total NLA in its portfolio of properties. Until then, we assume coverage with a NEUTRAL. Our DDM-derived TP of SGD1.22 (CoE: 7.1%, TG: 1%) implies a 1.7% upside from its current share price.

More inorganic growth expected

MLT’s 1HFY3/15 results are in line with our estimate, with 1H DPU accounting for 49% of our full-year estimate. With future occupancy for the Singapore portfolio expected to dip slightly as MLT converts more of its properties from single-tenanted buildings to multi-tenanted buildings and with only 8.8% of NLA left to be renewed, MLT is expected to grow through acquisition of quality assets from its sponsor. We maintain our Add rating, with our DDM-based (discount rate: 8.0%) target price rising to S$1.31 as we adjust our model slightly and roll over our forecast to the following year.

Stable quarter

Mapletree Logistic Trust’s (MLT) 2QFY15 results are in line with our expectations, with both revenue and DPU for the quarter accounting for 24% of our full year’s forecast. The slightly higher revenue came mainly from i) stronger contribution from Mapletree Benoi Logistics Hub, ii) positive rental reversions of 9%, mainly in Hong Kong, Malaysia and Singapore and iii) additional contribution from the Daehwa Logistic Centre in South Korea and Flex Hub in Malaysia in 1H. Occupancy remained stable at 97.2% (vs. 97.6% in 1QFY15).

Recent acquisitions to contribute to earnings in 3QFY15

MLT recently announced the acquisition of i) Mapletree Yangshan Bonded Logistics Park (MYBLP), and ii) Mapletree Zhengzhou Logistics Park (MZLP) for Rmb402.8m (S$83.9m) in total. With occupancy of 100% in both properties and NPI yield of 8.0% and 7.5%, respectively, these acquisitions are expected to start contributing to earnings in 3QFY15. DPU is expected to grow by c.1.4% from these acquisitions while the leverage ratio based on our estimate is expected to rise to c.35.3% from 33.3% at end-Sep 14.

Maintain Add

With only 8.8% of NLA due to be renewed for the rest of FY15, MLT is expected to grow mainly through acquisition in the coming quarters. Given the large pipeline of assets (c.2m sq m of GFA) spread across China, Hong Kong, Malaysia and Vietnam that could be injected into the REIT in the mid- to long-term, we believe MLT could continue to expand in the coming years. On this basis, we maintain our Add rating with a slightly higher target price of S$1.31 as we roll over our earnings forecast to the following year.

Expect one but ended with two

MLT announced that the acquisition of MZLP was completed today.Surprisingly, the acquisition of the previously speculated MYBLP was also completed today at a purchase consideration of S$42.8m. Given the 100% occupancy in both properties, the acquisitions of which were funded via debt, they are expected to boost DPU cumulatively by c.1.4%. Consequently, we upgrade MLT from Hold to Add, with a slightly higher DDM-based (discount rate: 8.0%) TP of S$1.24, as we tweak our FY15-16 DPS estimates upward by c.1.9% while anticipating more acquisitions to come through in the mid-term.

What Happened

Mapletree Logistics Trusts (MLT) today announced that it has entered into two separate sale and purchase agreements with its sponsor for the acquisitions of: 1) Mapletree Yangshan Bonded Logistics Park (MYBLP) for a purchase consideration of Rmb197.2m (S$41.1m), and 2) Mapletree Zhengzhou Logistics Park (MZLP) for a purchase consideration of Rmb205.6m (S$42.8m).

What We Think

The acquisition of MZLP has been highlighted previously on 21 July 14 and as such, this transaction has already been factored into our model. However, the acquisition of MYBLP, though previously speculated, was only confirmed today. MYBLP is a grade-A logistics facility with a GFA of 46,000 sq m comprising two blocks of single-storey warehouses with mezzanine offices. Currently, this facility is fully leased to two international 3PLs – Ocean East Logistics of the Maersk group and Air Sea Transport, with a weighted average lease term to expiry of 2.1 years. Both acquisitions were completed today. MYBLP is expected to achieve an NPI yield of 7.5% (slightly lower than the 8.0% yield projected for MZLP). Based on our estimates, MYBLP will be mildly yield accretive, boosting DPU by c.0.6%. With the two acquisitions, DPU is expected to rise by c.1.4% while leverage ratio will rise to c.35.3% (from 34.5%).

What You Should Do

Despite the tight market for good quality assets, we believe MLT will continue to expand via future acquisitions. After all, its sponsor still has sizeable logistics developments yet to be injected into the trust. On this basis, coupled with a slightly higher DPU forecast as a result of these acquisitions, we upgrade our rating to Add, with a slightly higher TP of S$1.24. Currently, MLT offers a FY15/FY16 dividend yield of 6.9%/7.1% – a level we do not consider demanding.