Mapletree Logistics Trust - External demand exposure to impact rents/occupancy

Our Singapore economics team sees weakness in external demand as the major threat to the economy. This, combined with a contraction of manufacturing output by 26.1% y-y in 1Q09, does not augur well for industrial demand, either for flatted factories or warehouses. According to the Ministry of Trade and Industry, Singapore lost 19,900 jobs in the manufacturing sector in 1Q09, with 1,700 transport and storage jobs lost in the same period. While recent data from the URA suggest that industrial supply is slipping, we expect vacancy in both the flatted factory and warehouse segments to broach 10% by yearend, impacting rents and asset value expectations. Indeed, in Mapletree’s recent 1Q09 results announcement, it was evident, in our view, that the REIT had opted to trade rent for tenure. While occupancy in the portfolio at end-1Q09 was 98.5% (down from 99.6% at end-FY08), renewals of expiring leases saw “flat” average reversion rates, a precursor to potential negative reversions. Approximately 166,700sm is subject to renewal in 2Q09-4Q09F, equivalent to 8% of the portfolio.

Since 2005, Mapletree Logistics Trust’s DPU yield has averaged 7.22%, equating to a 433bps spread over the average 10-year government bond of 2.89%. Currently, MLT’s FY10F yield is 8.6%, versus the current 10-year government bond of 2.60%. The historically low yield spread between MLT’s DPU yield and prevailing risk-free rate reflects, in our view, the market’s growth expectations for the REIT over the period driven by rental reversions and acquisitions — we note that during 2005-08, MLT saw average annual compound growth in its DPU of 19.2%. While we see MLT’s growth prospects as markedly different from those experienced in 2004-09 (we forecast its DPU will fall 30.6% over FY08-11F), there is inevitably a temptation to extrapolate past trends. Adopting the historical yield spread (433bps) and the current risk-free rate of 2.6% implies a yield of 6.93% (versus MLT’s current yield of 8.6%), equating to a unit price of S$0.74/unit. We believe our asset-based approach to valuing MLT incorporates the cashflow risks of both negative reversions and higher vacancy risk, and believe such “spread analysis” is both overly simple and simplistic.

We have revisited our earnings numbers and marginally raise our DPU forecasts for FY09-11F on the back of income expectations from recently completed/acquired properties. In addition to the marginally higher earnings, we have rolled forward our intrinsic net asset valuation to FY10F and determine an NAV of S$0.43/unit (previously S$0.37/unit). Valuations prompt us to cut our rating on MLT to REDUCE from Neutral.

Sponsored Links

Related Posts by Categories