CFA Society Singapore
SINGAPORE (Apr 30): DBS Vickers Securities is maintaining its “buy” call on Mapletree Industrial Trust (MIT) with a target price of $2.22, which has yet to price in the REIT’s potential acquisition of a warehouse at 7 Tai Seng Drive for $68 million from Mapletree Logistics Trust (MLT).
In a Monday report, DBS lead analyst Derek Tan highlights that the property was valued at $69 million by independent valuers Cushman & Wakefield and Savills, which was notably higher than the valuation of $36.1 million on MLT’s books.
In his view, the variance in valuation was largely due to a “change in use” for the property given MIT’s plan to convert it from a warehouse building into a high-specification industrial building – which points to the likely repositioning of the warehouse into a data centre.
“Pursuant to the agreement [with its sponsor and MLT], MIT will undertake c.$95 million worth of upgrading works to increase the power capacity and floor loading capacity, and to provide additional telecommunication infrastructure as well as space for mechanical and electrical equipment. Judging by the high-specification upgrades, we believe that MIT will likely be repositioning the warehouse into a data centre, in our view,” says Tan.
According to him, such a development opportunity “makes perfect sense” for the REIT to undertake as it would build a future pipeline from the value-accretive deal.
He adds that securing a tenant on a long-term contract would also translate to a “secured and certain” income stream upon development completion.
Although potential yields for the Tai Seng asset have not be disclosed, the analyst estimates MIT to achieve yields of 6.5-7% post the acquisition, which is similar to its historical average.
“While it will only be accretive to MIT’s distributable income from the second half of 2019 (FY20F), we are positive on the strategic addition of 7 Tai Seng Drive as it improves portfolio earnings visibility and quality,” says Tan.
“We have not priced in this acquisition, subject to JTC approval. MIT, with ample debt capacity to debt fund this development, is expected to see its gearing rise slightly to c.33%, still at a comfortable level,” he adds.
As at 12.27pm, units in MIT are trading 1 cent lower at $2.01 or 17.1 times FY19F book.