The pros negate the cons

MLT’s 1QFY15 results are in line with our estimate, with DPU for the quarter accounting for 25% of our full-year estimate. Future rental reversion is expected to slow down for the Singapore portfolio as the industrial market here remains under pressure amid further tightening in leasing policies. MLT will continue to grow through acquisitions of quality assets from its sponsor. However, as it is currently trading at 1.2x P/BV while offering an FY15 yield of 6.8% (vs. its peers’ 7.3%), we deem MLT as fairly valued. Maintain Hold with a slightly higher DDM-based (discount rate: 8.1%) TP of S$1.20 as we factor in the acquisition of MZLP and S$25m of potential acquisition in FY16.

Another strong quarter

Higher revenue was mainly the result of i) stronger contribution from Mapletree Benoi Logistics Hub, ii) positive rental reversions of 12% mainly in Hong Kong and Singapore, iii) contribution from the Korea property acquired in 2QFY14, and iv) higher revenue from four Japan properties that completed the installation of solar panels last year.

Acquisition of MZLP

MLT also announced the acquisition of Mapletree Zhengzhou Logistics Park (MZLP) for Rmb205.6m (S$41.1m). This property consists of 4 blocks of single-storey warehouses with 79,000 sq m GFA and is currently 99.2% occupied, with a WALE of 3.3 years. NPI yield for this property (estimated to be acquired by 3QFY15) is expected at 8.0%. Based on our estimates, this acquisition, fully funded via debt with an interest cost of 2.1%, will be mildly yield accretive, boosting DPU by c.0.8%, while the leverage ratio will remain a healthy 34.5%.

More acquisitions

During the analyst briefing, management guided that the Singapore industrial market could undergo short-term pressure, with future positive rental reversion limited to a high single-digit in FY15. Given a strong pipeline of assets from its sponsor, MLT could continue to grow via future acquisitions, with the next target most likely the Yangshan Bonded Logistic Park (45,900 sq m GFA) given the stabilised nature of the asset (86% occupied). Maintain Hold as we wait for more substantial acquisitions to come through.

Acquires new Korea warehouse

• Initial NPI yield at 8.3%
  
• Expected to be DPU-accretive
  
• Looking at higher growth markets
  

Expanding footprint in South Korea

Mapletree Logistics Trust (MLT) recently proposed to acquire Daehwa Logistics Centre from vendor Daehwa Logistics Co Ltd. This represents MLT’s investment of the ninth property in South Korea. At a purchase consideration of KRW25.5b (~S$31.2m), the asset is expected to generate an initial NPI yield of 8.3%. MLT intends to fund the acquisition by debt, and expects the transaction to be completed by Jul 2014. Based on our projections, the new addition could add an annualized 0.05 S cents to MLT’s DPU. On the other hand, MLT’s gearing is likely to increase marginally from 33.3% as at 31 Mar to 33.8%.

Details on the new property

Daehwa Logistics Centre is a three-storey Grade A dry warehouse with a GFA of 25,600 sqm located in the prime logistics hub in Seoul. It was completed in Dec 2013, and boasts modern specifications such as a floor-to-ceiling height of 10m, floor loading capacity of 2.7 ton/sqm and direct ramp access to all three floors. At present, the warehouse facility is fully occupied by three quality tenants, namely eBay (one of world’s largest e-commerce companies), Acushnet (global golf equipment company) and vendor Daehwa (fast growing local logistics operator). The leases have a weighted average lease to expiry of 3.5 years with built-in annual rental escalations for 70% of the leased area.

Maintain HOLD

We note that the acquisition is consistent with management’s guidance in Apr that it was performing the due diligence for a potential purchase of a Korea-based property. It is also in line with MLT’s strategy to rebalance its portfolio towards South Korea and other higher growth markets. Looking ahead, we believe MLT may turn to the China assets from its sponsor’s pipeline for further growth. However, pending any new development, we only factor in the acquisition of Daehwa Logistics Centre for now. Our fair value remains unchanged at S$1.10. Maintain HOLD on valuation grounds

MLT expands in South Korea

• MLT acquires Daehwa Logistics Centre, its ninth property in South Korea, for SGD31.2m which is to be fully debt funded.
  
• At an initial NPI yield of 8.3%, it is a DPU-accretive acquisition.
  
• A positive move but too small to ‘move the needle’ for MLT. Reiterate SELL with a higher TP of SGD1.01.
  

What’s New

MLT announced last evening that it has entered into a sale and purchase agreement for the acquisition of Daehwa Logistics Centre in South Korea for KRW25.5b (SGD31.2m). We believe this asset was highlighted by management during the FY3/14 briefing on which MLT had previously signed an MOU. The new property is fully occupied by three quality tenants: eBay, Acushnet and Daehwa. The leases have a weighted average lease term to expiry of 3.5 years with built-in annual rental escalations for 70% of the leased area. The acquisition will be fully debt funded with completion expected by July. MLT’s aggregate leverage ratio is expected to increase marginally to 33.8% from 33.3% as of 31 Mar 2014.

What’s Our View

The property’s initial NPI yield of 8.3% compares favourably to MLT’s cost of borrowing of 1.9% and overall portfolio NPI yield of 6.5%. While it is a DPU-accretive acquisition, it would only raise FY3/15E-FY3/17E EPS by up to 0.8%. Post transaction, revenue contribution from South Korea will increase from 8.7% to 9.4%.

Nonetheless, the size of the acquisition is too small to ‘move the needle’ for MLT and we look forward to more sponsor injections and third-party acquisitions in FY3/15E. We remain downbeat on industrial warehouse properties, as this segment is the most at risk of a sharp physical price correction. Maintain SELL on MLT with a slightly higher TP of SGD1.01 (previously SGD1.00) after factoring in this acquisition.

Ample acquisition firepower

• 4Q14 results slightly above estimates; NAV rises to S$0.97
  
• Gearing falls to 33%; ample firepower to execute on inorganic opportunities
  
• Maintain BUY, TP raised to S$1.20
  

Highlights

Strong end to FY14. Mapletree Logistics Trust (MLT) reported a DPU of 1.89 Scts in 4Q14, bringing its full-year DPU to 7.34 Scts, slightly beating our estimates. Operational performance continues to remain resilient with topline and net property income rising by 5.7% and 4.3% to S$80.1m and S$68.3m respectively. This is despite translation losses from JPY vs SGD, which was mitigated by strong underlying operational performance through: (i) Rental uplifts of c.17% mainly from its Singapore and Hong Kong properties, (ii) Contribution from two recently completed properties and the completion of its development of Mapletree Benoi Logistics Hub (MBLH). Portfolio occupancy levels also maintained steady at 98.3%. Distributable income came in 10.1% higher at S$46.3m, boosted by a lower interest rate of 1.9%.

NAV up by 5.4% to S$0.97; gearing down to 33%. This was mainly driven by higher rental income, with portfolio cap rates remaining stable. A majority of the uplift in NAV came from MBLH in Singapore. Meanwhile, gearing dipped slightly to c.33%.

Our Views

Foreign currency volatility substantially hedged. MLT maintains a conservative strategy to mitigate income volatility by hedging a substantial portion of its foreign-sourced income. As at 4Q14, c.95% of its distributions derived has been hedged. MLT has substantially hedged out its JPY exposures over the next two years, and the impact of a weak JPY/S$ has been mitigated in the immediate term.

Selective on acquisition opportunities. The lower gearing empowers MLT with significant capacity to execute its various development projects or pursue acquisition opportunities. Looking ahead, we see growth coming from: (i) Selective development opportunities within its portfolio (i.e. started on Toh Guan @ total cost of S$107m, target IRR of >7% and to complete by 1HCY16); and (ii) Acquisitions; the manager sees most opportunities in China/Korea/Singapore. In addition, we believe that the manager could tap on its sponsor for opportunities in the medium term. We are maintaining our S$100m acquisition estimates (35% met).

Recommendation

Attractive yields, BUY with S$1.20 TP. We raised our earnings upwards to account for lower–than-expected interest rates. Our TP is raised to S$1.20 as we roll forward our valuations. Maintain BUY.

Closing FY14 on positive note

• 4QFY14 DPU rose by 9.2% YoY
• Healthy rental reversion of 17%
• Revaluation gain of S$105.3m

4QFY14 results within expectations

Mapletree Logistics Trust (MLT) reported 4QFY14 gross revenue of S$80.1m and NPI of S$68.3m, up 5.7% and 4.3% YoY, respectively. The positive showing was due mainly to new income stream from Mapletree Benoi Logistics Hub, contribution from The Box Centre, and robust rental reversions from Hong Kong and Singapore. We note that NPI growth would be even stronger at 5.4%, if not for a weaker JPY. Nevertheless, the forex impact on distribution was mitigated by currency hedges. Together with lower finance costs and a distribution of S$0.6m divestment gain, DPU came in at 1.89 S cents, up 9.2% YoY. As a result, FY14 DPU totalled 7.35 S cents (+7.1%). This is in line with our DPU forecast of 7.26 S cents (consensus: 7.2 S cents).

Operational performance staying resilient

Operationally, MLT has been exhibiting resilience, as evidenced by its stable portfolio occupancy of 98.3% (3Q: 98.4%) and healthy rental reversion of 17% achieved during the year. For FY15, we note that ~18.0% of MLT’s leases will be expiring, of which 14.0% has been renewed ahead. Going forward, management expects the demand for logistics facilities in its markets to remain robust. In addition, rental reversion is expected to stay positive, albeit at a moderate pace.

Maintain HOLD on valuation grounds

MLT also reiterated its focus on driving organic growth through proactive leasing efforts and asset enhancements, such as the redevelopment of 5B Toh Guan Road East.

However, unlike previous quarter, management now raises the possibility of growth through acquisition. Specifically, MLT highlighted that it has signed an MOU for a Korea-based property from a third-party vendor, and is currently performing its due diligence for potential purchase. From its sponsor’s pipeline, MLT is eyeing two China-based assets. We believe MLT may carry out capital recycling to partially fund the potential investments, given that it has identified a few lower yielding assets for divestment. We lift our fair value from S$1.06 to S$1.10 as we roll our valuation to FY15. However, as the stock appears fairly priced, we maintain our HOLD rating.