Moving into growth markets

• 2Q13 results in line; operationally outlook to remain stable with minimal renewals in 2HFY13

• Acquisitions a likely catalyst, we have assumed S$200m in our numbers for FY14

• Maintain BUY, TP raised to S$1.22

Highlights

Stable results in 2Q13. Gross revenues and net property income grew 13.4% and 14.6% y-o-y to S$77.5m and S$67.5m respectively. The strong performance was attributable to contributions from its new acquisitions (7 Japanese properties, 4 in Korea and Malaysia), offsetting the loss of income from 1 building in Japan which was destroyed by a fire in 2011. Distributable income rose 12.8% y-o-y to c$41.3m (after accounting for S$4.7m to perpetual securities holders), translating to a DPU of 1.71 Scts (+1.2% y-o-y, +1% q-o-q). Performance on a sequential basis remained stable.

Operations looking stable. The group has successfully renewed 67% of the 12.7% of leases (by NLA) due in FY13, amounting to 228k sqm, securing average rental hikes of c8%. Portfolio occupancy levels saw an uptick of 0.2ppts to 99.2%, from improving demand in Singapore, Hong Kong and China. Looking ahead, given the relatively sticky nature of warehouse space and with only 4.2% of leases (by NLA) left to be renewed for the remainder of FY13, we expect MLT to continue delivering sustained results.

Distribution reinvestment plan. MLT has also instituted a DRP for this quarter, which we see as a positive development, subjected to takeup, funds can be used to re-deploy for capex/AEIs which are expected to be yield enhancing.

Our View

Capital Re-cycling, further acquisitions to be re-rating catalysts. The completion of the acquisition of Hyundai Logistics Centre in Korea will start contributing positively in 3Q13 and the trust is understood to be in negotiations with a major Japanese 3PL for a built-to-suit development in Iwatsuki Center (destroyed by fire previously) and is expected to return yields higher than its Japan portfolio.

Management continues to look for growth opportunities and targets higher growth countries (China, South Korea) and new markets like Indonesia. In addition, MLT has a visible pipeline worth a potential S$400m that could be executed on in the medium term. We have assumed S$200m worth of asset acquisitions (funded by 40%/60% debt/equity ratio) in our FY14F estimates, raising our estimates slightly by c2%

Recommendation

BUY call maintained, TP S$1.22. Given the availability of a visible pipeline and MLT trading at implied yields of 6.4%, we believe that acquisitions are a likely feature going forward and a further re-rating catalyst. Our TP is adjusted to S$1.22 as we now assume S$200m worth of acquisitions (nil previously) and we have also tweaked our rental growth rates for Singapore/Hong Kong which has continued to rise ahead of expectations. Maintain BUY.

Positives priced in

2Q displayed sustained stability, a hallmark of MLT's long-tenured logistics portfolio. But we believe the current environment of elevated asset values could throw a spanner in the works for MLT's asset hunt, a key source of growth and share price outperformance.

2Q/1HFY13 DPU met street and our estimates at 24%/48% of our FY13 forecast. We had factored in S$150m in acquisitions. We lower DPUs on reduced acquisition yields and timing. But our DDM target price is raised on a lower discount rate of 7.3% (prev. 8.6%). Downgrade to Neutral from Outperform on valuations.

Sustained stability

2Q displayed the sustained stability characteristics of MLT's long-tenured portfolio. 2Q DPU was up 1.2% yoy (3.0% excluding 2Q12's one-off gain) as a 15% NPI increase (from acquisitions and developments) was partially offset by higher funding costs. Leasing remained stable: Occupancy rose to 99.2% from 99.0%. Rental reversion remained positive at 8%, though it could have been a stronger 16% if not for distortion from the conversion of a hybrid lease in Singapore to triple-net basis.

But getting harder to find growth

Acquisitions and developments are the key sources of growth for MLT's portfolio. But we think that the current environment of elevated capital values could make this difficult. Excluding our assumed S$150m in acquisitions, FY14 DPU growth would have been a more muted <2% vs. our current 5%. Management has proactively engaged in advanced negotiations with a major Japanese third-party logistics service provider for a BTS development at Iwatsuki Centre, which was destroyed by a fire in 2011, though this is unlikely to be a major game-changer, in our view.

Downgrade to Neutral

MLT has outperformed the STI by 28% in the past year. We believe that current valuation at 1.3x P/BV and forward yields of 6.0-6.4% have priced in its portfolio stability. While acquisitions will likely be accretive against cheap funding costs, competition and elevated asset values should make attractive finds difficult.

STRONG SHOWING TO CONTINUE

• Increasing exposure in South Korea
  
• Positive on FY13 results
  
• Expecting 5.5% growth in DPU
  

Completion of acquisition of warehouse

Mapletree Logistics Trust (MLT) announced last week that it has completed the acquisition of Hyundai Logistics Centre in Gyeonggi-do, South Korea for KRW22.5b (~S$24.7m). The date of completion was ahead of our projection as MLT had previously guided that the transaction was targeted to complete by 3QFY13 (Dec quarter). Hence, the property will contribute two quarters to MLT’s FY13 income, as opposed to just a quarter in our estimate. As a recap, the property comprises two blocks of three-storey dry warehouses and has a total GFA of 32,300 sqm. The investment is expected to be DPU-accretive, with initial NPI yield of 9.0%. After factoring in the acquisition and divestment of 30 Woodlands Loop in Singapore, we note that the revenue contribution from South Korea is expected to rise from 7.0% to 7.7%.

Steady performance in FY13

For FY13, we remain confident of MLT’s financial performance. While management expects business sentiments to stay cautious in light of the slowing growth in Asia and concerns over the Eurozone crisis, we expect MLT to continue to benefit from its recent acquisitions and enhanced operational metrics. We also believe that positive rental reversions from its portfolio are still on the cards, albeit possibly lower than the average growth rate of 10% seen in 1QFY13. In addition, only 12.7% of its leases by NLA are due for renewal in FY13, of which ~42% has been successfully renewed/ replaced. Hence, we are positive of MLT’s results in the coming quarters.

Retain BUY rating

We are making minor adjustments to our FY13 forecasts to incorporate an earlier rental contribution from Hyundai Logistics Centre. Our FY13F revenue and DPU now stand at S$317.1m and 7.06 S cents, translating to a respectable growth of 14.3% and 5.5% respectively. There is no change to our fair value of S$1.19. Maintain BUY.

Capital Recycling to Bear Fruit

Capital Recycling. MLT has recently announced that it will be acquiring Hyundai Logistics Centre (HLC) in South Korea at SGD24.3m with an initial NPI yield of 9%. It will also be divesting 30 Woodlands Loop in Singapore (FY3/12 NPI yield-on-cost of 6% according to our estimates) at a sale consideration of SGD15.5m, booking a net disposal again of ~SGD4.96m. Both transactions will complete by 3QFY3/13 and Feb 2013 respectively. Gearing is expected to increase marginally to 37.2% upon completion of both transactions.

Our estimates. HLC is currently leased to E-Land World and ENVICO. We expect the acquisition to complete by Oct 2012 and have factored in modest rental escalations of 1.5% p.a. At existing 1QFY3/13 portfolio yield of 6.5%, we think this acquisition will be yield-accretive. We revise our DPU estimates by 0.3%-0.5% over FY3/13-FY3/16.

Still the highest WALE in the industry. MLT’s assets have increased by almost ninefold since the company listed in July 2005. Given its larger asset base, we expect further scale advantages ahead. MLT also has one of the industry’s highest weighted average lease expiry profiles (six years vis-à-vis AREIT’s four years). Despite having exposure to seven overseas markets, Singapore Japan and South Korea (tier-1 mature markets) constitute 76.3% of revenue and 76.4% of NPI in FY3/13 and 78% of our FY3/13 GAV, which should prove defensive in volatile markets.

Yields can be compressed by another 53bps. From our estimates, the implied cap rate for MLT (based on 1QFY3/13 results) is 6.09%. If we take this cap rate as the floor for FY3/13 DPU yield, we believe yields can still be compressed by another 53 bps from our forecasted FY3/13 DPU of 6.6%. This dovetails neatly with our DDM-derived TP of SGD1.17. We are confident that MLT’s stable assets and rental income resilience will help it navigate the choppy waters ahead. Reiterate BUY.

PORTFOLIO OPTIMIZATION VIA CAPITAL RECYCLING

• Acquisition to be DPU-accretive
  
• Divestment amount above valuation
  
• Enhanced market position in South Korea
  

Acquisition of warehouse in South Korea

Mapletree Logistics Trust (MLT) announced on 28 Aug that it will acquire Hyundai Logistics Centre in Gyeonggi-do, South Korea for a consideration of ~S$24.6m. The property comprises two blocks of three-storey dry warehouses and has a total GFA of 32,300 sqm. Both the leases to its two key tenants, E-Land World (major apparel and retail company) and Korea Environment & Resources Corp (government corporation) provide for built-in rental escalation. According to management, the initial NPI yield is 9.0% and is expected to be DPU-accretive. We understand that the acquisition is targeted to complete by Dec 2012.

Divestment of 30 Woodlands Loop

Separately, MLT had entered into an agreement to divest 30 Woodlands Loop in Singapore for S$15.5m. This represents a significant 50.5% and 40.9% premium to its purchase price of S$10.3m in 2007 and valuation of S$11.0m in Mar 2012 respectively. A net disposal gain of ~S$5.0m is expected. We note that 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. The divestment is expected to be completed by Feb 2013, and the sale proceeds will be redeployed to partially fund the acquisition in South Korea. As the investment is financed by a combination of debt and equity, gearing is only expected to inch up slightly from 37.0% as at 30 Jun to 37.2% upon completion of both transactions.

Maintain BUY

We view both transactions positively as it clearly reflects MLT’s capability to optimize portfolio returns through proactive asset management and as the acquisition is likely to strengthen MLT’s market position in South Korea. The capital recycling initiative and overseas acquisition were also spot on with our projections made in our 21 Aug S-REIT sector report. We now tweak our forecasts to accommodate the two transactions. Our FY13-14F DPUs are raised by 0.3-0.7%, but there is no change to our fair value of S$1.19. BUY.