• 1QFY16 DPU grew 8.8% YoY
• Some negative rental reversions
• Industry headwinds remain

1QFY16 results within our expectations

Mapletree Industrial Trust (MIT) reported 1QFY16 revenue of S$81.6m, representing an increase of 4.1% YoY. This formed 25.2% of our FY16 projection. DPU grew at a stronger pace of 8.8% YoY to 2.73 S cents, due partly to a NPI margin expansion of 1.5 ppt to 73.7%. This constituted 26.1% of our full-year forecast, which we view as in line with our expectations.

Operating metrics for MIT remained largely solid, with an improvement seen in its occupancy rate from 90.2% to 93.5%. Overall portfolio passing rent inched up slightly from S$1.84 psf per month in 4QFY15 to S$1.86 psf per month in 1QFY16. Aggregate leverage ratio now stands at 30%, with 88% of its debt fixed/hedged.

Negative rental reversions for two segments

Despite the decent financial performance for 1QFY16, a worrying trend came in the form of negative rental reversions for renewal leases recorded for its Business Park Buildings (-1.5%) and Stack-Up/Ramp-Up Buildings (-5.7%) segments. Although rental reversions for its Flatted Factories (+3.6%) and Hi-Tech Buildings (+1.9%) came in positive, we note that the momentum has slowed as compared to the respective 9.6% and 10.1% reversion figures achieved in FY15.

We believe this reflects the tough leasing environment within the industrial sector, amid a backdrop of sluggish economic growth and oversupply concerns. MIT’s management has, nevertheless, done a good job in proactively engaging its tenants, as only 9.8% of leases (by revenue) are expiring for the remainder of FY16 (18.8% at start of the financial year).

Maintain SELL

Industry watchers are expecting rents for multiuser industrial developments to ease further, while business parks and higher specification buildings are expected to fare better. We are retaining our forecasts, S$1.34 fair value estimate and SELL rating on MIT, given evident industry headwinds.

In addition, we believe valuations are unappealing at current price level, as MIT’s yield spread of 4.1 ppt against the Singapore Government 10-year bond yield comes in at ~1.5 standard deviations below the historical mean of 5.0 ppt.

Source: OCBC Research - 22 Jul 2015