9MFY3/14 results in line with our and market expectations.

Japan portfolio continues to languish; the aggregated revenue and NPI for the past four quarters fell 16% YoY.

Capital value still at risk. FY3/14E-16E DPU CAGR of 1% is unexciting. Maintain contrarian SELL with TP lowered to SGD0.98.

Takeaways from conference call

Reasonable debt headroom. With gearing at 33.9%, MLT has a debt headroom of SGD450m before hitting the 40% leverage ratio. But it has not had much luck with acquiring assets from its sponsor, Mapletree Investments Pte Ltd (MIPL) in the past year despite MPIL having 13 sizeable logistics developments in Asia.

Weak yen a concern. The weakening Japanese yen remains a concern because Japan is home to about 25% of MLT’s assets and accounted for 21% of its revenue in 3QFY3/14. Moreover, its forex hedging has been concentrated mainly in FY3/14 and management did not disclose the swap rates for future years.

Eye on growing rental market. MLT said it has converted two single-user assets (SUAs) into multi-tenanted buildings (MTBs) in FY3/14, with another two to be converted by Mar 2014. It plans to progressively shift its SUA-to-MTB ratio from 59%:41% currently to 50%:50%. This would shorten its weighted average lease expiry periods in the coming years (3QFY3/14: 4.8 years), as MTBs have shorter three-year leases vs at least five years for SUAs and are better able to capture the upside of a growing rental market.

What’s Our View

We forecast DPU to grow at an unexciting 1% CAGR over FY3/14E- 16E. MLT said active lease and asset management will remain a key management priority, especially in Singapore in view of the upcoming supply of 3.9m sq ft of warehouse space in 2014. In terms of acquisition, we are still waiting to see if MLT will target sponsor injections such as Mapletree Shah Alam Logistics Park in Malaysia and Mapletree Zhengzhou International Logistics Park in China. We cut our FY3/14E-16E DPU forecasts by 0.3-0.5% in anticipation of lower growth prospects and higher borrowing costs. The stock has corrected by 6% in the previous quarter. Maintain SELL with a lower DDM-derived TP of SGD0.98.

Source: Maybank Kim Eng Research - 22 Jan 2014