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Analysts maintain 'buy' on MLT, although CGS-CIMB trims target price

Lim Hui Jie
Lim Hui Jie7/25/2022 11:34 AM GMT+08  • 5 min read
Analysts maintain 'buy' on MLT, although CGS-CIMB trims target price
Mapletree Yuyao Logistics Park II China
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Analysts from four brokerages have maintained their ‘buy’ rating on Mapletree Logistics Trust (MLT), although CGS-CIMB Research’s Lock Mun Yee and OCBC Investment Research have cut their target price.

CGS-CIMB has slashed their target price from $2.10 to $2.05, and OCBC Investment Research dropped its target price from $2 to $1.92.

Maybank Securities’ Chua Su Tye and UOB Kay Hian’s Jonathan Koh on the other hand, have held their target prices at $2.15 and $2.08 respectively.

In their reports, the four brokerages mentioned that MLT had “met expectations” with its 1QFY2023 results ended June.

In its 1Q results, MLT recorded a 17.2% y-o-y rise in distributable income to $108.6 million. As such, distribution per unit (DPU) rose 5% to 2.268 cents on an enlarged unit base following the placement in the last quarter of 2021.

CGS-CIMB’s Lock says that as of end-1QFY2023, MLT has hedged 80% of its debt into fixed rates and hedged 73% of its distributable income in the next 12 months.

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In terms of sensitivity, every 25 basis points hike in interest rates would translate to a 1-cent shift in DPU.

MLT’s revenue in the quarter rose 14.6% y-o-y to $187.7 million, but property expenses increased by 24.8% to $24.4 million due to the enlarged portfolio and higher property and land tax.

Accordingly, net property income (NPI) in 1QFY2023 increased by 13.2% y-o-y to $163.2 million

See also: Macro headwinds a potential dampener for CDL: OCBC

MLT’s portfolio occupancy dipped slightly q-o-q to 96.8% as at end-1Q, dragged down by\ lower occupancies in Singapore, South Korea and China, partly offset by an improvement in take-up in Japan and Hong Kong.

There was a stronger positive rental reversion of +3.4% in 1QFY2023 compared to +2.9% in 4QFY2023, with the most uplift from Singapore, India, Vietnam, Japan and Malaysia.

About 24.2% of its rental income is up for renewal in 9MFY2023, the bulk coming from China, Singapore and South Korea.

In her report, Lock says that the REIT’s management remains “cautiously optimistic” on rental reversions in China as leasing sentiment improved towards the end of the first half of 2022.

“This was particularly so in Tier-1 cities, albeit amid moderate take-up as tenants remain cautious about capacity expansion,” she writes.

UOB Kay Hian’s Koh adds that Tier-2 cities have experienced slower take-up, and tenants are cautious, some having signed shorter leases of one to two years.

Overall occupancy for MLT’s China portfolio eased by 0.2 percentage points q-o-q to 92.9% in 1QFY2023.

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Management expects continued weakness in 2QFY2023, but “recovery is in sight” starting 3QFY2023, with Koh noting that key tenants, such as JD.com and Cainiao, are keen to renew their leases.

Lock also sees that leasing demand for warehouse space is expected to stay resilient, supported by domestic consumption, e-commerce and inventory stockpiling.

On the acquisition front, she adds that MLT continues to explore inorganic growth and sees opportunities in Australia, Japan and South Korea.

Its gearing stood at 37.2% as at end-1Q, translating to a potential debt headroom of $700 million (based on a 50% guideline ceiling) and it plans to recycle $300 million worth of assets in Singapore, South Korea and Malaysia.

Koh identifies two projects that MLT is expected to place more emphasis on in the near term, namely, 51 Benoi Road in Singapore and developing the first modern ramp-up logistics property in Subang Jaya, Malaysia. These will be complete by 4QFY2025 and 2027 respectively.

MLT has acquired two parcels of leasehold industrial properties at Subang Jaya, which are located next to its existing Subang 3 and 4 logistics properties.

Maybank’s Chua estimates about $700,000 to $2.2 billion of debt headroom to support acquisitions, adding that management is eyeing a $2.5 billion deal pipeline.

However, this is at a below 20% conversion rate, although the REIT will continue to execute on its $300 million - $500 million divestment plan.

Separately, OCBC Investment Research also echoed this point, saying that MLT's management has strong execution capabilities, and its portfolio capital recycling strategy has also resulted in net divestment gains being distributed to unitholders.

"Although MLT will not be immune to uncertainties in the macroeconomic environment, we expect it to remain relatively more resilient vis-à-vis its peers," they said, adding that the brokerage sees MLT as a key beneficiary of the structural shift towards more robust e- commerce growth trends ahead.

While they expect that MLT's management would exercise "prudent capital management," the rising interest rates mean that OIR raises its cost of equity assumption from 6.4% to 6.6%, mainly driven by an increase in our risk-free rate assumption from 2.5% to 3.25% and lowering its fair value.

OCBC also writes that "[MLT's] management highlighted that it was still actively exploring inorganic growth opportunities, but will adopt a more stringent selection criteria given a higher cost of capital."

As at 11.21am, shares of MLT were trading at $1.75, with a FY2023 P/B ratio of 1.03x and a dividend yield of 5.14%.

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