Mapletree Logistics Trust (OCBC)

Maintain BUY
Previous Rating: BUY
Current Price: S$0.915
Fair Value: S$1.01

Spotlight is on South Korea

KPPC Pyeongtaek Centre. Mapletree Logistics Trust (MLT) recently announced that it has signed a conditional sale and purchase agreement with Korea Port Processing Co. Ltd (KPPC) for the acquisition of KPPC Pyeongtaek Centre at a purchase pr ice of approximately S$85.9m. The proper ty comprises two blocks of dry goods warehouses with a total GFA of about 100,900 sqm. There is also potential for organic growth as it has yet to maximise its permissible plot ratio, which will yield an additional GFA of close to 20,000 sqm. The property provides an initial NPI yield of 8.6%. The vendor, KPPC, will lease the entire property for a period of 5 years with an annual rental escalation of 3.0%. MLT has stated that this acquisition marks an important milestone to entrench the trust into the South Korea market. The acquisition is expected to be completed by 3Q11. Given the sizeable acquisition, the contribution of South Korea to the total portfolio's gross revenue is expected to increase from 2.7% to 5.6%. Consequently, KPPC will be the first Korean customer in MLT's list of top ten tenants; thus further diversifying its tenant base. Assuming that the purchase price and other acquisition costs of the property are fully funded by debt, MLT's gearing level will increase to about 41% (after taking into account all acquisitions and divestments announced to date).

Capital recycle play in action. MLT also announced on 31 May that it has completed the divestment of 9 Tampines Street 92 for a total consideration of S$12.8m. Approximately S$11.2m will be redeployed to partially fund the acquisition of Jian Huang Building. Recall that 39 Tampines Street 92 is still in the midst of divestment for S$14.7m. MLT has previously cited that the two properties have building specifications that are now outdated and no longer ideal for modern logistics operations. Given its limited growth potential, it believes that divesting these assets would be the best option to maximise returns. MLT expects the disposal gain to result in a one-time increase in FY11 DPU by 0.07- 0.09 S cents.

More acquisitions to come. Apart from Korea, MLT has also added that it is actively looking at acquiring a warehouse (60,000 sqm and 98% leased) in Malaysia from its sponsor. MLT should be able to complete the acquisition by this year. Going forward, i ts main acquisi t ion focus cont inues to be in Singapore, Malaysia and South Korea. MLT has a proven track record of execut ing a vi r tuous cycle of accret ive acquisi t ions and competitive fund-raising. It is also a favourable move to recycle proceeds into better-yielding assets. Factoring in contributions from the new acquisition, our fair value increased from S$1.00 to S$1.01. Reiterate BUY.

Tenants at KPPC Pyeongtaek Centre. KPPC was established in 2000. It is a third party logistics operator, providing logistics and related value-add services, such as pre-delivery inspection, for major end-users and manufacturers in Korea. In addition to KPPC, the property is also subleased to other tenants. The main sub-tenant, E-Land Retail Co. Ltd ("ELand"), occupies approximately two-thirds of the property. E-Land is part of an integrated fashion and retail Korean conglomerate with a reported turnover in 2010 of KRW7.4 trillion (approximately S$8.4 billion). With more than 60 brands under its ownership, the E-Land Group has international presence in China, Hong Kong, Vietnam, the United States and Europe.