Mapletree Industrial Trust: Strategic acquisition in US to lift portfolio January 24, 2018

PSR Recommendation: NEUTRALStatus: MaintainedTarget Price: SGD2.15
  • Gross revenue 4.1% higher than expected; we under-estimated the impact of Phase 2 of the HP build-to-suit
  • DPU consequently higher than our estimate by 3.6%
  • JV of 14 US data centres started contributing and mitigates domestic headwinds
  • Maintain Neutral; higher target price of $2.15 (previously $1.99)

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The Positives

  • Higher back-filling of space vacated by Johnson & Johnson at The Strategy. The vacated space (28% of NLA at The Strategy) is now 23% back-filled, which is slightly higher than the 15% reported in the previous quarter.
  • Gearing remains relatively low at 33.8%, albeit higher QoQ from 30.0%. The increase in borrowings was to part fund the acquisition of the US data centres.
  • Enquiries are picking up at the Kallang AEI project. The manager reported that it has secured 12% commitment for 30A Kallang Place and Kallang Basin 4 Cluster asset enhancement initiative (AEI), improving the 3% that was stagnant over the previous two quarters. There are more enquiries for the property now that it is almost completed (expected to obtain temporary occupation permit in January or February). The manager has ~18% more in discussion and is optimistic on reporting 30% occupancy at the end of FY17/18 and 75% occupancy by the end of CY2018. Prospects are coming from technology companies such as software and information technology development.

The Negatives

  • Portfolio weighted average rental reversion of -1.18%. Dragged down by Flatted Factories (-1.6%) and Stack-up/Ramp-Up Buildings (-1.7%).
  • Marginally lower Singapore occupancy QoQ from 90.4% to 90.1%. Dragged down by Flatted Factories (a larger tenant not fully renewing space) and Business Park Buildings (effect of J&J pre-termination). However, overall portfolio is marginally higher at 90.5%, after taking into account the 40% proportionate share of the US data centre portfolio that is 97.4% occupied.

Outlook

The outlook is stable to positive. Oversupply situation is improving, with the tapering of new supply in 2018. MINT has two projects coming on stream in 2018 – Kallang AEI (leasing is ongoing) and data centre BTS (no occupancy risk) which should contribute positively to the portfolio.

Maintain Neutral; higher target price of $2.15 (previously $1.99)

We have revised our FY18e/FY19e revenue estimates 1.7%/3.9% higher than previous. DPU estimates for FY18e/FY19e have been raised 3.8%/9.2% higher. Key positives are the higher proportion of Hi-Tech Buildings segment in the portfolio following the injection of the US data centres, and the relatively low gearing. Estimated yield of 5.8% should be stable with some upside, but we find valuation uncompelling. Our target price represents an implied 1.48 times FY18e P/NAV multiple.

 

Update to New Data Centre BTS

The fourth storey structure slab has been completed and installation of external façade has commenced. The project remains on track for completion in 2H 2018.

Figure 1: BTS Project – New Data Centre

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Source: Company 3QFY17/18 Financial Results Presentation, 23 January 2018

Relative valuation

MINT is trading above the peer average P/NAV multiple and at a lower 12M-trailing yield than the peer average.

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Historical valuation

Figure 2: 12M-forward P/NAV (x) more than +2 std dev above historical average

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About the author

Profile photo of Richard Leow

Richard Leow
Investment Analyst
Phillip Securities Research Pte Ltd

Richard covers the Transport Sector and Industrial REITs. He graduated with a Master of Science in Applied Finance from the Singapore Management University. He holds the CFTe and FRM certifications and is a CFA charterholder.

He was ranked #2 Top Stock Picker for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.

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