Acquisition pipeline remains strong

Comment on Results

On target for S$1bn acquisition per year

Growth again due to acquisitions. Mapletree Logistics Trust (MLT) reported a good set of 1Q07 results. Revenue was up over 116% YoY and 7% QoQ to S$28.8m, and distributable income improved 84.2% YoY and 23% QoQ to S$15.3m. Distributable income per unit (DPU) was less robust, improving by 33% YoY and 2% QoQ to 1.48 cents. This is slightly better than OIR’s forecast of 1.40 cents. The bulk of the growth came from the acquisition of 25 properties (worth S$785m) over the last 12 months and 8 properties over the last quarter. MLT currently has a portfolio of 49 properties worth about S$1.5bn and will acquire a further 13 properties worth about S$470m in 2H07. This should bring its total asset size to about S$2.0bn. MLT is well positioned to continue its growth strategy and we see an annual acquisition of S$1.0bn per year as not improbable.

Next markets in South Korea and Vietnam. Presently MLT’s country/ territory exposure is in Singapore, Malaysia, China, and Hong Kong. MLT recently announced a mega acquisition of 5 assets worth S$350m in Japan, a project worth S$17.8m in Xian, and 2 projects worth S$13m in Malaysia. We expect it to enter more new markets in 2H07; namely South Korea, Vietnam and India. All these acquisitions are likely to boost its DPU. We have thus revised up our FY07 and FY08 DPUs from 5.6 cents and 5.9 cents to 6.2 cents and 6.5 cents, respectively.

Successfully raised S$349m. The key event over the last quarter was the successful raising of fresh equity. A gross proceed of S$349m was raised with the issue of 296.822m new units at a weighted cost of S$1.176 per unit. The proceeds of the new equity have been used to finance the acquisition of 15 recently bought properties and to refinance other older acquisitions. With the new equity, MLT’s gearing has fallen back to about 40% range. More importantly, it means that MLT can raise a war chest of S$300m if it maximizes its gearing to 60%.

Maintain BUY with higher fair value. MLT has done well since our last report; appreciating from S$1.19 to our fair value of S$1.33. However, at the current pace of acquisition, our target asset size of S$3.0bn is likely to be breached by 2008. We have thus revised up our target size to S$4.0bn. This, together with lesser dilution from the issue of fewer new units, has a positive impact on our fair value estimate. We have thus revised up our fair value from S$1.34 to S$1.50 and maintain our BUY recommendation.

Reaching fair value

• 1Q07 in line. 1Q07 distributable income of S$15m (+84% yoy) represents 20% of our full-year forecast and 23% of consensus’s. MLT’s 1Q is traditionally the weakest and we expect earnings to step up over the next three quarters to meet market and our targets for this year.

• Rental revenue more than doubled to S$29m, underpinned by the acquisition of 25 new properties in the last 12 months. MLT’s current S$1.5bn portfolio is over twice its size a year ago. There are now 13 announced acquisitions worth S$467m pending completion, which should take MLT’s portfolio to S$2bn. As such, we are confident that our S$2.4bn target for end-2007 can be met.

• Sustained high occupancy. Overall occupancy stood at nearly 100% at the end of 1Q07. MLT has secured a new tenant for 1,000 sf of space at TIC Tech Centre (NLA 30,758 sq m, third-largest asset by revenue contribution), taking the property to full occupancy in the coming quarter. A three-storey extension with 6,285 sq m of space will be added to TIC Tech Centre. EBITDA yield for the additional space is projected at 8.1%, when the enhancement work is completed in Oct 07.

• Overseas properties from sponsor. Two overseas properties developed by sponsor Mapletree, Lingang Free Port (S$39m, GFA 46,500 sq m) in China and the Vietnam Singapore Industrial Park (VSIP1, GFA 23,600 sq m), have been completed early this year. Three out of five units at VSIP1 have been leased and we believe this property could be injected into MLT as early as this year. It was also reported recently that MLT could be buying its first assets in South Korea and India very soon. As competition for assets on the home turf intensifies, MLT’s capacity for regional expansion should give it an advantage.

• Maintain Neutral. While our FY07-09 DPU forecasts have been maintained, our DDM target price has been raised from S$1.32 to S$1.43 to reflect stronger projected DPU growth for FY10 (cost of equity 6.5%, implied CY07 yield of 4%). With a projected DPU CAGR of 12% for the next four years, MLT remains one of the fastest-growing REITs in Singapore. Above-average forward yields of 4.3-5.3% should provide ample support for the share price.

Branching out with acquisitions

Increased presence in the Japan market. MLT has penetrated into the Japanese market further with its recent acquisition of five logistics facilities – four in Tokyo and one in Kyoto. The total consideration of the acquisition is S$350.8m. The five logistics facilities have a total land area of 108,968sqm (GFA: 103,864sqm) with lease terms ranging from seven to 18 years. The acquisition is expected to be completed by mid 2007 and given the relative lower cost of borrowing in Japanese yen, the purchase would be wholly funded by debt.

Acquisition of a distribution centre in China. MLT has also recently announced its first acquisition in inland China with the purchase of Xian Seastar distribution centre for S$17.8m. As the Chinese government continues to increase its efforts to develop the inland regions, this would allow MLT to ride on the growth. The acquisition is expected to be completed by mid 2007 and would be wholly funded by debt.

Strategy. MLT still has around S$440m of debt headroom to maintain its gearing limit of 60%. MLT expects to make its first acquisitions into South Korea and Vietnam this year and to increase its exposure in China with more acquisitions. MLT intends to move into India next year and in the medium term, its growth will come from the emerging markets of India and China. The initial acquisitions in India are likely to come from its sponsor, Mapletree Investments, which has tied up with Bangalorebased developer Embassy Group to build logistics developments in India. With the recent acquisitions of the five logistics facilities in Japan and a distribution centre in China, MLTs portfolio has an exposure of 48%, 5%, 24%, 5% and 19% in Singapore, Malaysia, Hong Kong, China and Japan respectively.

Maintain Buy with raised target price of S$1.46. With the recent increase in the stock price by 14% since our last report, we have increased the assumed issue price for further equity raising activities to fund its acquisitions pipeline. As such, we have a lower number of assumed units issued and hence, higher DPU and a raised target price of S$1.46 based on DCF valuation. This derives a total return, including yield, of 17%. In our valuation, we have assumed acquisitions of S$1bn p.a. from 2007 to 2009. Maintain Buy.

Biggest acquisition to date

MLT has acquired five logistics facilities in Japan from Itochu Corp for ¥27.8bn S$350.8m). Four of the properties are located in the Greater Tokyo area and the fifth in the Kyoto (Kansai) area. All five properties are freehold and have a total GFA of 103,864 sq m. The multi-tenanted assets come with long lease tenures of 7-18 years. The acquisition is expected to be completed by mid-2007.

Second acquisition in Japan, following the completion of the purchase of Gyoda Distribution Centre (S$24.4m, floor area 17,094 sq m; also from Itochu) last month. This is also the largest acquisition by MLT since its listing two years ago, beating its S$211.1m acquisition of Hong Kong’s Shatin No. 4 (floor area 60,215 sf) in April last year.

Demand for quality logistics space in Japan is rising, according to Colliers International. There is now a shortage of large high-quality distribution centres in key areas and modern distribution facilities with floor areas of over 3,000 sq m make up less than 50% of the total stock in Japan. The five properties that MLT has acquired have floor areas of above 3,000 sq m, with the biggest measuring 41,171 sq m.

Initial yield lower than expected. The acquisition will be funded entirely by debt as MLT wishes to take advantage of the low cost of borrowing in Japanese yen. The resulting proforma accretion to MLT’s FY06 DPU is 0.56ct (+11%). Assuming a cost of debt of 1% and a weighted average management fee of 2%, we estimate the average initial yield of the assets at 4.3%. While this is lower than the weighted average yield of 4.9% that we had assumed for MLT’s acquisitions this year, we expect the impact to be offset by acquisitions of higher-yielding assets in other markets such as China later in the year.

Valuation and recommendation

Reaching our target price; downgrade to Neutral. With the acquisition of these five properties, MLT’s total assets now amount to just under S$2bn (including acquisitions that are pending completion). We had projected an increase of S$1bn in asset size to S$2.4bn by the end of this year. We believe MLT is on course to meet our target. As such, our DPU forecasts and DDM-target price of S$1.32 remain unchanged. With the REIT trading near our target price, we downgrade MLT to Neutral from Outperform. Above-average forward