MapletreeLog banking on rights issue

Move will enable the company to boost capacity for acquisitions

A RIGHTS issue will boost Mapletree Logistics Trust’s capacity for acquisitions, but the trust will only selectively take on deals that are highly accretive.

‘While we remain committed to our yield plus growth strategy, in the current environment, the manager’s immediate focus is to optimise yield from organic growth through extracting positive rental reversions and undertaking asset enhancements,’ said the CEO of Mapletree Logistics Trust Management (MLTM) Chua Tiow Chye.

‘We believe that with a robust balance sheet after the rights issue, we are well positioned to operate in the current more uncertain times,’ he said in a statement.

‘While current market conditions do make acquisition opportunities more readily available, we will evaluate these selectively and only if they are highly accretive.’

MapletreeLog’s unitholders approved a renounceable rights issue to raise around $606.7 million at an extraordinary general meeting on Friday. Of the net proceeds of around $591.6 million, $348 million or 59 per cent will be used to finance or refinance the acquisition of target properties.

Another $243 million will be used to repay debt, while the remaining proceeds will go towards general corporate or working capital needs.

MapletreeLog made the rights issue to strengthen its balance sheet – by lowering its gearing and improving its debt coverage ratio, for instance – and to increase the free float of its units.

‘Notwithstanding the dilution, we should still do better this year than last year,’ said MLTM’s deputy CEO and CFO Richard Lai at a briefing yesterday.

This could be due mainly to the full accounting of contributions from MapletreeLog’s earlier acquisitions and positive growth in its base properties.

MapletreeLog on Sunday reported distributable income of $22.6 million and available distribution per unit (DPU) of 2.04 cents for the second quarter ended June 30.

Both results were 28 per cent higher than in the same period last year.

Mapletree units ended trading at 70 cents yesterday, 0.5 cent down.

Possible overhang after rights issue

• In line. 2Q08 distributable profit of S$22.6m was in line with our expectations, forming 22% of our full-year estimate. DPU grew 28.2% yoy to 2.04cts, forming 28% of Street expectations and 38% of our forecast for FY08. We expect 2H to be stronger on the back of the completion of acquisitions and rental reversions. Our forecasts have factored in dilution from a coming rights issue. Revenue increased 28.4% yoy to S$43.8m on full contributions from 18 properties acquired in 2007 and four properties acquired in the quarter, as well as average rental reversions of 12% over preceding rates.

• Approved rights issue to strengthen balance sheet. At an EGM held on 18 Jul, unitholders approved a renounceable rights issue of 831.1m new units to raise S$606.7m. Despite the recent fall in MLT’s share price, the rights offer price of S$0.73 was maintained, with all excess rights not taken up by investors or the sponsor Mapletree Investment Pte Ltd to be absorbed by the four underwriting banks. However, we note that there is no moratorium to prevent the underwriters from releasing their units on the open market after the rights issue. Proceeds will be used to bring down MLT’s asset leverage from 56% to 37%, and its short-term debt from 42% of total debt to an estimated 10%. MLT’s average debt duration would also be stretched from 2.15 years to about three years.

• FY08 DPU forecast raised; but target price lowered to S$0.85 (from S$1.00). The rights issue is a bitter pill that needs to be taken, in our view, in order for MLT to break out of its high gearing. We have raised our FY08 DPU forecast of 5.4cts to 7.6cts, after adjusting for a shorter 4-month dilution effect. Following this, our DDMderived target price rises to S$1.03 (discount rate 8.0%) from S$1.00. At the rights offer price of S$0.73, dividend yield for FY08 is 10.4% while price upside potential of 38% is higher than for its peer, A-REIT (AREIT SP, Outperform, S$2.20, target price S$2.60) (yield 6.6%, price upside 18%). But as we see risks of a share overhang after the rights issue, we have brought our target price down to S$0.85, which is MLT’s estimated book level post-dilution. Maintain Neutral.

Mapletree Logistics Q2 income surges 28% to $22.6m

Portfolio rises to 76 properties worth $2.48b with addition of 4 units in quarter

MAPLETREE Logistics Trust has reported a distributable income of $22.6 million for the second quarter ended June 30, 2008, up 28 per cent from the corresponding period last year.

Available distribution per unit (DPU) was 2.04 cents in Q208, also 28 per cent higher year-on-year, the trust said yesterday.

For H108, total amount distributable was $43.6 million, 32.3 per cent more than H107. DPU for the first six months came in at 3.94 cents, 28.3 per cent more than 3.07 cents previously.

Mapletree will pay the DPU of 2.04 cents on August 29.

The trust’s portfolio increased from 72 properties valued at $2.42 billion in Q108 to 76 properties worth $2.48 billion in Q208. Singapore accounted for 54 per cent of the second quarter’s net property income.

‘MapletreeLog’s geographically-diversified portfolio, comprising properties spread across six countries, continues to generate diversified and stable cashflows for our unitholders,’ said Chua Tiow Chye, chief executive officer of Mapletree Logistics Trust Management.

Taking the bitter medicine

MLT proposes renounceable rights issue

Seeking S$606.7m through rights issue. MLT held a briefing last evening to clarify its rights issuance announced last week. In a nutshell, MLT will be seeking unitholders’ approval at an EGM on 18 Jul for its proposal to issue 831.1m rights at S$0.73 apiece. This would raise funds of S$606.7m, assuming full take-up. The funds would be used for the acquisition of 12 properties and the extension of one property that were announced last year, partial debt repayment and corporate and working-capital uses. Sponsor Mapletree Investments Pte Ltd has undertaken to vote in favour of the rights issue and subscribe for its 30.16% entitlement. It also has an option to subscribe for excess units. Any remaining rights not taken up by the sponsor will be underwritten by DBS, Goldman Sachs, Macquarie Capital and UBS.

More opportunities to acquire at improved yields. Management guided that growth in the Asian logistics industry and demand for logistics space in the region remain strong. As a result of the credit crunch, sellers are now more relenting in their asking prices, resulting in moderately improved yields. Management also indicated that the company will continue to grow via acquisitions. However, it will be more conscious of keeping gearing levels to a lower 45-50%.

Comments

Gearing down to 38%. Assuming full take-up of the 831.1m rights, the S$606.7m raised will repay part of the debt taken to acquire the 12 properties and extend one property. Management guided that short-term debt from Singapore, Hong Kong and Malaysia is likely to be paid down. Gearing could fall from 55% to 38%, inclusive of the properties, giving MLT more financial flexibility to acquire when opportunities arise.

Immediate dilution. Assuming full take-up, the share base will enlarge from 1,108.2m units as at end-FY07 to 1,939.3m units. Our earlier DPU forecast of 6.9cts for FY08 will fall to 5.44cts after dilution, yielding 6.4%.

Valuation and recommendation

Downgrade to Neutral from Outperform; target price reduced to S$1.00 from S$1.36. We have cut our DPU estimates by 20-22% to account for dilution from the rights issue. Additionally, we are assuming an improved acquisition yield of 7% over the 6% used earlier. Our discount rate has also been raised from 6.7% to 8.0% from a high risk-free rate of 5.4% and an equity premium of 4.0%, in line with house guidelines. Accordingly, our DDM-derived target price has been lowered to S$1.00.

We see the proposed rights issue as a bitter pill that needs to be taken at some stage in order for MLT to come out of its high gearing, and move forward. MLT’s fundamentals of a quality portfolio, long leases (average lease term to expiry is 5.7 years), high occupancy rate of 99.6% and reputable tenants remain. Nonetheless, a slowdown in acquisitions this year and an expected increase in cost of debt may imply that ML is not likely to see much price catalyst in the near term.

Worst fears realised

Investment summary

We have downgraded our rating for Mapletree Logistics Trust (MLT) to 3 (Hold) from 1 (Buy) after the manager finally relented and announced, on 24 June, a S$606.7m three-for-four rights issue at S$0.73 per rights unit.

Fundamentals

• We had identified a rights issue as a major risk factor previously, although we expected MLT to stay put, and ride out the weak market (we were wrong).

• We have revised down our distribution-per-unit (DPU) forecasts by 30.8% for 2008, 27.1% for 2009, and 24.3% for 2010, after incorporating the terms of the highly dilutive rights issue.

• Based on a theoretical ex-rights price of S$0.84 (from the 24 June closing price of S$0.93), the adjusted FY09 forecast yield is about 6.95%.

• We have lowered our six-month target price, based on our RNG valuation method, to S$0.94 from S$1.30.

• We believe MLT has enough deal flow to soak up the rights issue, but that by then the manager would face future equity-fund-raising (EFR) challenges with a spotty (in our opinion) capital-management track record.