BUILDING SCALE THROUGH INVESTMENTS

• Performance to stay firm
  
• Weaker JPY to have limited impact
  
• Strong growth potential
  

Strength from diversification

Mapletree Logistics Trust (MLT) has one of the most diversified portfolios in the industrial REIT space, with 110 logistics assets located across seven countries in Asia. This allows MLT to capitalise on the robust demand for warehouse space from retailers and third-party logistics companies as a result of the region’s strong underlying fundamentals and robust domestic consumption, as well as to maintain a sturdy financial performance. Operational metrics have also proven its resilience thus far, as evidenced by the positive rental reversions of 8% and continued improvement in the portfolio occupancy in 2Q.

Likely limited impact from depreciating yen

For 3QFY13, we expect the positive trend to continue, driven by healthy rental and take-up rates and contributions from MLT’s past acquisitions. While the recent weakness in JPY against SGD (depreciated ~11.6% since start of Oct 2012 and 6.3% a month ago) may have an impact on its distributable income given that ~27% of its revenue was contributed by Japan historically, we note that ~90% of amount distributable in FY13 is hedged/ derived in SGD. Hence, we believe any impact from a depreciating yen is likely to be limited.

Multiple avenues for growth

We also like MLT’s growth potential. MLT has been able to pursue inorganic growth at a time when the cap rates in Singapore have become relatively competitive, thanks to its strong pipeline of overseas assets from its sponsor. We highlight that MLT has the right of first refusal to over S$400m worth of pipeline assets which are nearing completion/ completed. Such assets usually have comparatively higher yields than those in its existing portfolio, which would enhance its DPU. On top of this, MLT will also focus on capital recycling and asset enhancement/redevelopment. These initiatives are likely to boost MLT’s income and yield going forward. We maintain our BUY rating and S$1.25 fair value on MLT. At current price level, its current DPU yield of 6.1% is also higher than the S-REIT average yield of 5.9%.

Acquisition Growth Reigniting

Buying Mapletree Wuxi Logistics Park. Mapletree Logistics Trust (MLT) recently announced that it intends to acquire Mapletree Wuxi Logistics Park (MWLP) from its sponsor for CNY116m (SGD22.8m) with an initial NPI yield of 8%. The purchase will be funded by debt and gearing is expected to increase marginally to 37.3% upon completion. Following this, we estimate that MLT still has debt headroom of SGD197m before hitting an aggregate leverage ratio of 40%.

Likely to be yield-accretive. MWLP is currently leased to reputable local and international companies, including Wuxi Hi-tech, Kerry Logistics, Fiege International Freight Forwarder and Konoike, with typical 2-3 year lease term. We expect MLT to complete the acquisition by end-March 2013 with an initial passing rent of SGD0.40 psf per month (or CNY0.73 psm per day). At the existing 2QFY3/13 portfolio yield of 6.5% and fully debt-funded, we think this acquisition will be yield-accretive.

30 Woodlands Loop divestment is off. MLT also said that the divestment of 30 Woodlands Loop to Accenovate Engineering Pte Ltd will not be completed. JTC Corporation has informed that the buyer’s application to purchase the property was not approved as it did not meet the evaluation criteria (value-add etc). Had the transaction gone through, MLT would have booked a net disposal gain of ~SGD4.96m, given that the sale consideration for this property was SGD15.5m. A-REIT encountered a similar disapproval for the divestment of Goldin Logistics Hub on 26 Nov and we suspect that these may be “soft” government attempts to put a lid on the already overheated industrial property prices.

Acquisition hotspots. MLT has previously opined that it will focus more on acquiring assets in China and South Korea, and less in Japan. We understand that there is a scarcity of modern logistics facilities in China but with only six properties (excluding 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 2QFY3/13 results) is 6.1%. The counter currently trades at 6.4% FY3/13 DPU yield, which we believe is almost near the end of its yield-compression cycle. MLT has risen 12% since our BUY call in Jun 2012 when we initiated coverage. For now, maintain HOLD with a TP of SGD1.14. We prefer A-REIT (TP: SGD2.65) which has more room for yield compression.

INCREASING PRESENCE IN CHINA

• Another accretive acquisition
  
• Unsuccessful divestment
  
• Fair value raised slightly
  

Acquisition of China warehouse

Mapletree Logistics Trust (MLT) recently announced its intention to acquire Mapletree Wuxi Logistics Park (MWLP) in China from its Sponsor. The purchase consideration of RMB116m (~S$22.8m) was at a 2.5% discount to the average valuation of RMB119m by two independent valuers. Management guided that the acquisition is expected to be accretive at the DPU level, with an initial NPI yield of 8.0%. This is higher than the implied yield of 6.0% for MLT’s existing China portfolio. According to MLT, MWLP is located in Wuxi New District where it enjoys good connectivity, hence making it suitable as a distribution centre for both domestic and overseas market. At present, we understand that MWLP is leased to a strong tenant base of reputable companies including Wuxi Hi-tech, Kerry Logistics and Fiege International Freight Forwarder. The transaction is in line with our view that MLT will seek to expand its presence in overseas market such as China. Upon completion, it will represent MLT’s third acquisition from its Sponsor’s development pipeline.

Sale of Woodlands property will not proceed

Separately, MLT also updated that the divestment of 30 Woodlands Loop in Singapore to Accenovate Engineering Pte Ltd will not proceed. This was because the buyer’s application to purchase the property was not approved by JTC Corporation as it did not meet its evaluation criteria. MLT expressed disappointment with the unsuccessful sale but said it will continue to optimize the property’s yield while actively explore divestment or other value-enhancing opportunities. We have earlier assumed the divestment to be completed by Feb 2013, as previously guided by MLT.

Maintain BUY

We now factor the China warehouse acquisition into our forecasts (expected to complete by Mar 2013). We also reverse the divestment of 30 Woodlands Loop as the sale will not be completed. Accordingly, our fair value inches up slightly from S$1.24 to S$1.25. Aggregate leverage is expected to reach 37.3% based on MLT’s estimates, assuming the acquisition is fully funded by debt. Maintain BUY.

Tapping sponsor’s pipeline

Proposed accretive acquisition from sponsor’s development pipeline. Mapletree Logistics Trust (MLT) announced that it is proposing to acquire Wuxi International Logistics Park (WILP) from its sponsor Mapletree Investments Pte Ltd. The purchase price of Rmb 116m (S$22.8m) implies an initial yield of 8.0%, and is higher than the implied NPI yield of 6.0% for its China properties. We note that MLT has the financial capacity to

fund these acquisitions, and gearing is expected to stay relatively stable at 37.3% (assuming 100% debt funding). While accretive, impact on DPU is estimated to be minimal at <1%. Completion of this deal is expected in Mar’13, and will grow MLT’s portfolio to 111 properties with a total appraised value of S$4.2bn.

Quality tenants imply stable earnings. This acquisition highlights management’s emphasis on bringing the trust back on the growth track and in line with MLT’s investment strategy in expanding its presence in “growth markets” like China. The proposed acquisition of WILP will be the trust’s 3rd acquisition from its sponsor’s development pipeline, and is leased to a strong pool of tenants including Wuxi Hi-Tech, Kerry Logistics, Fiege International Freight Fowarder and Konoike Logistics.

BUY maintained, S$1.22 TP based on DCF. No change to our earnings estimates as we have previously forecasted close to S$200m worth of acquisitions in our numbers. Yields of close to 6.5% remain attractive in our view for its large cap, quality sponsor status. Further re-rating catalyst is likely to hinge on the manager’s continued ability to continue sourcing accretive acquisitions – either from its sponsor or from third party sources – to grow its portfolio and distributions meaningfully.