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Analysts keep 'buy' on Mapletree Industrial Trust with lower TP on higher rates assumptions

Khairani Afifi Noordin
Khairani Afifi Noordin10/28/2022 06:22 PM GMT+08  • 4 min read
Analysts keep 'buy' on Mapletree Industrial Trust with lower TP on higher rates assumptions
Kallang Basin 3. Photo: MINT
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Analysts are keeping their “buy” and “add” calls on Mapletree Industrial Trust (MINT) with lower target prices on the back of higher utility and borrowing costs.

DBS Group Research analysts Derek Tan and Dale Lai note that the spike in utility costs has already impacted MINT’s 2QFY2023 numbers and should stabilise from current levels. However, given the rise in global interest rates, the analysts are keenly watching the REIT’s refinancing efforts to keep interest costs manageable.

Tan and Lai have kept their "buy" call and trimmed their target price to $2.70 from $3.05 previously.

MINT has reduced its aggregate leverage ratio from 38.4% to 37.8%, with 74.2% of its debt hedged with a long weighted average hedge tenor of 4 years. However, its weighted average all-in debt cost increased by 0.4 percentage points q-o-q to 2.9, which appears steep relative to other S-REITs which have reported their results thus far, OCBC Investment Research (OIR) analysts point out.

“Based on MINT’s estimates, every 100 basis points is expected to impact its pro forma 2QFY2023 DPU by -1.5%. We pare our FY2023 and FY2024 DPU forecasts by 1.8% and 3.2%, respectively, as we factor in higher borrowing costs and push back our income contribution projections from MINT’s Kolam Ayer 2 Cluster redevelopment project. We also raise our cost of equity assumption from 6.7% to 6.8% due to a higher risk-free rate of 3.5%,” they add.

Given OIR’s house view for the US to enter a mild recession in 2023 and likelihood of tougher inorganic growth opportunities ahead, the analysts have reduced their terminal growth rate by 25 basis points to 1.5%. Consequently, their fair value estimate declines to $2.64 from $2.91, while keeping their "buy" call.

See also: Brokers' Digest: Mapletree Industrial Trust, IREIT Global, Jumbo Group, Netlink NBN Trust, PropNex

MINT has raised proceeds of $40.2 million from its distribution reinvestment plan (DRP) for 1QFY2023, which represented a healthy take-up rate of 42.9%. The DRP will be applied for 2QFY23 to finance the Kolam Ayer 2 Cluster redevelopment project at 161, 163 & 165 Kallang Way, UOB Kay Hian analyst Jonathan Koh says. Koh maintains his "buy" call with the target price of $3.12.

MINT’s portfolio occupancy ticked up to 95.6% in 2QFY2023, with Singapore portfolio occupancy at 96.8%. The improvement in take-up and positive rental reversions of about 1% came from business parks, flatted factories, light industrial buildings and stack-up buildings, CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong highlight.

“Looking ahead, MINT has 6.8%/17.9% of its gross rental income to be renewed in 2HFY23 and FY2024, mainly from its Singapore flatted factories, hi-tech buildings and US data centres. Management retained a cautious outlook and would adopt a tenant retention strategy for its portfolio,” they add.

See also: Top Glove unlikely to turn profitable in the near term: Maybank

There was a slight decline in occupancy rates for its US data-centers due to non-renewal at 2 Christie Heights, Leonia, but the manager is already in active talks for another tenant to take over, DBS analysts say. “Overall portfolio rental reversions stayed positive at an average of about 2.6% for key property segments, implying that portfolio organic growth outlook remains firmly on an uptrend.”

Lock and Ong have kept their "add" call but lower their FY2023-2025 DPU estimates by 0.79%-1.27% to factor in the larger unit base due to new units from MINT’s DRP programme. Their DDM-based target price is lowered to $2.61 due to the lower DPU estimates and higher cost of capital assumption.

Tan and Lai project resilient earnings for MINT over FY2022-FY2024, despite the impact of higher earnings costs eating into distributions. “Growth will come from the completion of its redevelopment of Kolam Ayer, which will be completed in phases from FY2024 onwards. The tapering of US Federal Reserve hikes will also lift the overhang of refinancing risk for the stock over time.”

Units in MINT closed 2 cents lower or 0.89% down on Oct 28 at $2.23.

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