• Expertise in build-to-suit projects
• Expect growth to moderate
• Highest P/B ratio among industrial REITs

Singapore-focused industrial REIT with build-to-suit expertise

Mapletree Industrial Trust (MIT) is a Singapore-focused REIT which primarily invests in industrial real estate assets in Singapore, excluding properties chiefly used for logistics purposes. Its current portfolio comprises 85 industrial properties with a NLA of 14.6m sq ft. The combined market valuation of MIT’s portfolio was S$3.2b as at 31 Mar 2014, with a sizeable proportion coming from flatted factories (48.4%). MIT has also established a niche in build-to-suit (BTS) development projects, which we believe provides it with a strong competitive advantage and also better income stability and visibility.

Resilient to new JTC subletting rules, but growth to moderate

We believe a primary strength of MIT is its relative resilience to recent regulatory changes introduced by JTC. Only 6% of its GFA and gross revenue are affected by the new JTC sub-letting policy changes. Looking ahead, we expect MIT’s gross revenue to be driven by contributions from its BTS developments and continued rental reversions, albeit at more modest levels. Although we project MIT’s distributable income to increase at a CAGR of 4.4% from FY14-FY17F, we expect flat DPU growth in FY16 and FY17 after a forecasted 3.2% rise in FY15. This is largely attributed to an enlarged unit base assumption from MIT’s Distribution Reinvestment Plan.

Initiate coverage on MIT with HOLD

We value MIT using the dividend discount model (DDM) and derive a fair value estimate of S$1.43 (cost of equity: 7.8%; terminal growth rate: 0.5%). Although forecasted distribution yield of 6.9% for both FY15 and FY16 appear attractive, we believe current valuations are fair, with the stock trading at a forward P/B ratio of 1.21x. This is in-line with its average forward P/B ratio since its listing. As compared to its peers, MIT’s historical P/B ratio of 1.23x is currently the highest. Its forward yield spread with the Singapore Government 10-year bond yield has compressed to 451 bps, which is 60 bps below the average historical spread level of 511 bps. In light of the aforementioned factors, we initiate coverage on MIT with a HOLD rating.

Source: OCBC Research - 21 Nov 2014