• 2QFY16 DPU grew 7.3% YoY
• Challenging leasing market
• AEI to support growth

2QFY16 results ahead of our expectations

Mapletree Industrial Trust (MIT) reported 2QFY16 revenue of S$82.7m, representing an increase of 6.2% YoY. DPU rose 7.3% to 2.79 S cents, and was above our expectations largely due to a higher-than-expected NPI margin of 73.8% (+1.6 ppt YoY). For 1HFY16, MIT’s gross revenue was up 5.1% to S$164.4m, and this constituted 50.7% of our FY16 projection. DPU of 5.52 S cents translated into a growth of 8.0%, forming 52.8% of our full-year forecast. Operationally, MIT’s occupancy improved slightly on a QoQ basis from 93.5% to 93.8%, while overall average portfolio passing rent rose marginally from S$1.86 psf per month in 1QFY16 to S$1.88 psf per month in 2QFY16.

Some negative rental reversions recorded

Nevertheless, given the challenging leasing market, MIT saw a second consecutive quarter of negative rental reversions for renewal leases for its Business Park Buildings (-1.5%) and StackUp/Ramp-Up Buildings (-2.5%) segments. Rental reversions for its Flatted Factories and Hi-Tech Buildings also came in relatively subdued at 1.7% and 0.5%, respectively, and were softer than the 3.6% and 1.9% delivered in 1QFY16. Given the lacklustre operating landscape, management has sought to enhance its portfolio specifications by announcing an AEI at Kallang Basin 4 Cluster to grow its Hi-Tech Buildings segment. This involves building a new 11-storey Hi-Tech Building and carrying out improvement works to existing buildings. This would add an additional GFA of 317,000 sq ft and is expected to be completed by 4QCY17. We expect this S$77m initiative to be financed by debt, given MIT’s healthy aggregate leverage ratio of 29.7%. 80% of its debt has been fixed/hedged.

Upgrade to HOLD

We raise our FY16 and FY17 DPU projections by 3.7% and 2.8%, respectively, as we input higher occupancy and NPI margin assumptions in our model. Consequently, our DDM-derived fair value estimate increases from S$1.34 to S$1.36. Coupled with a 3.8% decline in MIT’s share price since we downgraded the stock to a ‘Sell’ on 21 Jul 2015, we now see limited downside returns ahead. Upgrade to HOLD.

Source: OCBC Research - 21 Oct 2015