Category: MLT
MLT – OCBC
VALUATION LOOKS FAIR NOW
- Positive expectations likely factored in
- Caution on various fronts
- Further upside appears limited
Strong recent price performance
Mapletree Logistics Trust’s (MLT) units have performed very well since our last report on 25 Mar, notching a 8.7% gain versus a 1.5% increase in the STI and 4.9% increase in the FTSE ST REIT Index. We believe investors are finally acknowledging MLT’s attractiveness due to a confluence of factors. Firstly, MLT is likely to put on a good showing for its 4QFY13 results on 17 Apr, with DPU possibly accelerating 5.8% YoY to 1.80 S cents on the back of incremental rental income from its newly acquired Korea and China properties. Secondly, MLT is likely to record a meaningful gain in its asset values as part of the annual revaluation exercise, and this may in turn boost its NAV and improve its gearing level. In addition, the sweeping monetary easing by Bank of Japan announced last week has likely spurred much interest in MLT’s units, as it is expected to benefit from its exposure in Japanese properties.
Unit looks fairly priced now
At a P/B ratio of 1.45x, however, we believe MLT is now fairly priced. While ~55% of its revenue is derived from overseas assets, we are mindful that a substantial 658k sqm of supply in warehouse space (8.9% of total 4Q12 warehouse stock) is expected to be delivered to the Singapore warehouse market in 2013. This is likely to exert pressure on warehouse occupancy rates as well as cap the rise in rentals and the rate of positive rental reversions achieved by MLT in the near term. In addition, with the introduction of the cooling measures in the industrial market and upfront land premium by JTC, investors are inevitably more cautious as it may now be more onerous for industrial landlords to acquire properties. Given the market conditions, we believe that any upside in MLT’s units is limited at the current juncture.
Downgrade to HOLD
We tweak our RNAV assumptions and roll over our valuation to FY14. This raises our fair value from S$1.25 to S$1.34. Downgrade MLT from Buy to HOLD on valuation grounds.
MLT – OCBC
SECOND DISPOSAL ATTEMPT
- Sale of Singapore property at S$15.5m
- Transaction likely successful this time
- Potential distribution of disposal gains
Divestment of 30 Woodlands Loop
Mapletree Logistics Trust (MLT) announced last Friday that it has entered into an option to purchase agreement with Advanced CAE Pte Ltd, a subsidiary of SGX-listed Advanced Holdings Ltd, for the divestment of 30 Woodlands Loop in Singapore at a sale price of S$15.5m. This represents a significant premium to its purchase price of S$10.3m in 2007 and its valuation price of S$11.0m in Mar 2012. The divestment is expected to be completed by May, and is expected to generate a net disposal gain of ~S$5.0m, which will be distributed to unitholders (subject to clarification on tax treatment). Assuming the disposal gain is tax-exempt, we estimate an additional DPU of 0.2 S cents in FY14 due to the divestment.
Second capital recycling attempt
30 Woodlands Loop is a four-storey factory building with a build-up area of ~89,340 sqft and a leasehold tenure of 60 years from 1 May 1995 (42 years remaining). The property was first put up for sale in Aug 2012 at the same price tag of S$15.5m to Accenovate Engineering Pte Ltd. According to the initial announcement, the decision to divest the property came as a result of limited growth potential (building specifications no longer suitable for modern warehousing requirements) and attractive offer on hand. However, as the buyer’s application to purchase the property was not approved by JTC Corporation after failing to meet its evaluation criteria, the transaction did not proceed further. In the current case, we understand that JTC has already granted in-principle approval for the transaction subject to the fulfilment of stipulated conditions. Hence, we expect the divestment to go through.
Maintain BUY
We re-jig our forecasts to take into account the divestment and the potential distribution of the net disposal gains in FY14. However, our fair value remains unchanged at S$1.25. We maintain our BUY rating on MLT.
Industrial REITs – DMG
Change in game rule by JTC
Since the beginning of the year, JTC has indicated that property funds, such as REITs, have to pay land premium upfront for all industrial buildings acquisitions from sellers on JTC-leased sites, instead of paying in terms of a monthly land rental. Through this change in rule, REITs will have to set aside a sum of capital for the payment of upfront land premium; thus essentially raising the acquisition costs of industrial buildings. Having said that, we expect some of the REITs to counter this measure via i) lower acquisition price on the property to make up for the upfront land premium and/or ii) requesting the seller of the property to pay a higher leaseback rental to compensate for the land premium having been paid (i.e., a double net versus a triple net rental). Although the long term impact of this change in policy remains to be seen, we believe there will be pressure in the industrial property prices and rentals in the short term.
Minimal change expected to tenants expenditure. Before the change in policy, tenants of industrial properties have been paying the land rental through triple-net tenant agreements. We expect tenants that lease space in newly acquired industrial buildings will have to pay a higher rental rate to make up for the upfront land premium. However, on a net basis, there is little difference in the total amount of rental expenses incurred by tenants, as the amount previously paid for land rental in a triple-net tenant agreements forms part of the new double-net tenant agreements.
REITs may find it trickier to buy new properties. With the change in this policy, industrial REITs will be facing a hurdle in terms of future acquisitions as the capital involved in buying new properties rise. As REITs try to crawl back or offset a portion of these upfront charges (whether through lump sum pro rata basis or discount in acquisition price), there is a likelihood that building owners may choose to sell their buildings to industrialists since it is possible that they can sell the property at a higher price (given that industrialists can continue to pay a monthly land rental under the new policy). In our view, we believe this option to be limited to i) smaller buildings, as industrialists are unlikely to buy over a larger property than they require; ii) when owners of the buildings do not seek to sell and lease back the property for their own use.
Impact of change in policy may not be all bad. After the change in policy, REIT managers will have to factor in the additional capital expenditure into the IRR for any acquisitions. In our view, as long as the IRR can meet each REIT’s requirement, REITs will continue to acquire buildings; particularly on the back of low interest rate and relative ease in financing. In addition, although paying the land premium upfront may translate to a higher initial acquisition cost, this may prove to be cheaper in the long run as land rent paid on a monthly basis are subjected to a 5.5% annual escalation cap. Lastly, it is important to note that this change in policy do not affect BTS projects that some REITs plan to undertake this year.
MLT – Kim Eng
Looks fairly valued; Catalyst limited
3Q & 9M FY3/13 results inline. 9MFY3/13 revenue at SGD232m (+13% YoY) was 73% of ours and 76% of consensus estimate. 3QFY3/13 revenue at SGD77m (flat QoQ, +8% YoY), was 24% of ours and 25% of consensus estimate. 9MFY3/13 DPU at 5.13 SG-cts (+3% YoY) was 73% of ours and consensus estimates. 3QFY3/13 DPU at 3.53 SG-cts (+0.6% QoQ, +1% YoY) was 25% of ours and consensus estimates. Aggregate leverage inched down to 35.9% from 37% last quarter. Interest rate for 3QFY3/13 averaged 2.40% with an average term of debt of 4.1 years.
Portfolio review. Portfolio occupancy remains stable at 99.2%. MLT garnered 17% positive rental reversions from leases renewed/replaced in 3QFY3/13, mainly contributed by leases in Singapore and Hong Kong. To-date, of the 12.7% of leases (by NLA) due for renewal in FY3/13, the Manager has successfully renewed/replaced 85% of these. We also noted that the Japan portfolio suffered a 4.7% QoQ dip in revenue and 4.6% QoQ decline in NPI. This was attributed to the weakening of Yen against SGD. Nonetheless, management maintained that its impact on DPU is offset by its existing forex hedges.
Acquisition hotspots. For inorganic growth, MLT opined that it will focus more on acquiring assets in China, South Korea Malaysia or even Australia, but less in Japan. The recent Mapletree Wuxi Logistics Park (MWLP) acquisition (completed on 11 Jan) attests to this strategy. We understand that there is a scarcity of modern logistics facilities in China but with only seven properties (including MWLP), we doubt that MLT can scale fast enough to stand against big boys like Global Logistic Properties, which thrive on “network effect” and operational synergies.
Trading yield looks tight for further compression. From our estimates, the implied cap rate for MLT (based on 3QFY3/13 results) is 6%. The counter currently trades at 6.2% FY3/13 DPU yield, which we believe is almost near the end of its yield-compression cycle. We have factored in the completion of the MWLP acquisition. Pending further acquisitions and asset enhancement initiatives, we see limited near-term upside for now. Maintain HOLD with a TP of SGD1.16. We prefer A-REIT (TP: SGD2.60) which has more room for yield compression and DPU growth.
MLT – DBSV
Steady growth profile
• Stable 3QFY13 result
• Resilient portfolio; 17% positive rental reversion led by robust demand in Singapore and Hong Kong
• Future acquisitions are re-rating catalysts; BUY, S$1.22 TP offers 12% total return
Highlights
3QFY13 result in line with expectations. Gross revenues grew 7.7% y-o-y to S$77.4m and net property income 9.7% to S$67.5m. This was attributed to contribution from a larger portfolio (7 Japan properties, 4 in Korea and Malaysia), which also offset lost income from two properties in Iwatsuki Centre, Japan, that were destroyed by a fire in 2011. Organic growth remained fairly modest at 0.5% y-o-y. NPI margin inched up to 87.3%, driven by savings in property maintenance expenses in Singapore. Distributable income inched up 1.1% y-o-y to S$41.8m (after distributions to perpetual securities holders), translating into 1.72 Scts DPU (+1.2% y-o-y); the increment would have been higher at 3% if we exclude divestment gains paid out a year ago.
Our View
Resilient portfolio; Singapore and Hong Kong seeing strong rental reversions. Portfolio occupancy remained healthy at 99.2% and the trust continues to record positive rental reversions to the tune of 17%, largely from Hong Kong and Singapore. Looking ahead, given the relatively sticky nature of warehouse space and only 14.7% of its income up for renewal in the coming financial year, we expect reversions to still remain positive and thus earnings should continue to remain firm.
Future acquisitions could re-rate stock. Recently acquired Wuxi Logistics Hub (@ 8% yield) will start to contribute positively in the coming quarter. And with an implied yield of 5.8%, we expect MLT to remain on the hunt for more acquisitions regionally with a focus on growth regions like China, South Korea, Malaysia and even Australia (sponsor or 3rd party). We continue to believe that future acquisitions will occur in the immediate term and will re-rate the stock.
Recommendation
Maintain BUY rating and S$1.22 TP. We continue to like MLT for its resilient earnings and a visible pipeline of acquisitions that when acquired is likely to lead to higher distributions.