Mapletree Industrial Trust - Positive accretion but at high cost (CIMB)

OUTPERFORM Maintained

S$1.18 Target: S$1.27

Wins Tranche 2 of JTC second divestment

MINT has been awarded Tranche 2 of JTC’s second-phase divestment portfolio of S$400.3m, a shade below the appointed valuers’ S$402.7m valuation but 46% above the second bid by AREIT. With an implied entry yield of 5%, we believe the bid was aggressive. Management, however, highlighted the stronger reversionary growth potential for this acquired tranche vs. its existing portfolio, with rentals estimated at more than 30% below JTC’s newly-posted rents. Part of the acquired portfolio is also located near its existing assets within the Kallang Basin, providing opportunities for operational and leasing efficiencies. Management is reviewing financing options. No change to our DPU estimates pending details on financing. We continue to like MINT for its organic growth potential and maintain our earnings estimates as well as DDMbased target price of S$1.27 (discount rate 8.4%). Catalysts could include higher-thanexpected rental reversions.

The news:

MINT has been awarded Tranche 2 of JTC’s second-phase portfolio divestment of S$400.3m, a shade below the appointed valuers’ valuation of S$402.7m. This implies a valuation of S$145 psf GFA and S$189 psf NLA. With a total GFA of 256,251sq m and NLA of 196,898 sq m, the portfolio comprises eight flatted factories and three amenity centres across five property clusters within established industrial estates in the central and eastern regions of Singapore. Contrary to our expectations, renewal rates will still be subject to a rental escalation cap of 5% per annum on JTC’s latest posted rents (1 Jul 11) for three years from the completion date (estimated Aug 11), mirroring MINT’s existing portfolio of flatted factories. Management is still reviewing its financing options.

Comments:

Entry yield of 5%. Management estimates overall rentals for the acquired portfolio at more than 30% below JTC’s latest posted rents of about S$1.53 psf for the clusters near the acquired tranche. Coming in 46% above the second highest bid by AREIT (AREIT was likely less keen on this portfolio) and implying an entry yield of only 5% (vs. its current portfolio’s 7%), we believe the bid was aggressive, notwithstanding the growth potential.

Strong potential. Management, however, sees stronger rental reversion for this acquired tranche vs. its existing portfolio, due to an under-rented portfolio and the ability to benefit from JTC’s newly posted rents in Jul 11. Kallang Basins 1, 2 and 3 clusters would also complement its nearby assets in Kallang Basins 4, 5 and 6, which should afford some operational and leasing efficiencies and cost savings. Management also notes a more centralised location for these newly acquired assets and opportunities for asset enhancement which could further propel rental growth.

Funding likely through debt and equity. Management is reviewing its financing options and will be releasing more details after its 1Q12 results on 26 Jul. With limited debt headroom of S$373m to a 45% gearing, we expect the acquisition to be funded by a mix of debt and equity. Assuming 50:50 debt-equity, we expect moderate DPU accretion of about 1% for FY13 when full-year contributions kick in. We set out below the DPU accretion expected in FY13 on different assumed debt-equity funding and placement prices.

Valuation and recommendation

Maintain Outperform. We keep our DPU estimates pending details on the funding mix. Assuming 50:50 debt-equity, we expect moderate DPU accretion of 1% for FY13 when full-year contributions kick in. We continue to like MINT for its organic growth potential and expect catalysts from higher-than-expected rental reversions.