• 1QFY18 DPU +2.5% YoY
• Improvement in NPI margin
• Upside likely limited

1QFY18 Results Within Our Expectations

Mapletree Industrial Trust (MIT) reported its 1QFY18 results which met our expectations. Gross revenue and NPI grew 5.6% and 6.9% YoY to S$88.8m and S$68.2m, respectively, with the latter forming 25.2% of our FY18 forecast. This was driven largely by revenue contribution from Phase One of the built-to-suit project for Hewlett-Packard Singapore and higher NPI margins (+0.9 ppt YoY to 76.8%) across all business segments with the exception of Hi-Tech Buildings. DPU of 2.92 S cents represented an increase of 2.5% YoY and constituted 24.4% of our full-year forecast.

Some Challenges Seen

MIT’s average portfolio passing rental rate continued to exhibit resilience, inching up 0.5% QoQ to S$1.95 psf/month in 1QFY18. However, occupancy saw a slight dip from 93.1% (as at end-FY17) to 92.6%, with the drag coming from its Flatted Factories and Hi-Tech Buildings segments. Retention rate for the latter came in at only 52.0% for the quarter, versus 74.8% for MIT’s entire portfolio. In terms of rental reversions for renewal leases, only Flatted Factories had an uplift (+0.6%), while Business Park Buildings, Hi-Tech Buildings and StackUp/Ramp-Up Buildings saw negative rental reversions of 4.5%, 1.9% and 1.5%, respectively.

Downgrade to HOLD

MIT recently completed the divestment of the 65 Tech Park Crescent property for S$17.7m, which was transacted at an attractive 34% premium over its acquisition price and slightly above its last valuation of S$17.6m. We factor this into our model, and also incorporate lower occupancy assumptions for Business Park Buildings in FY19 (largely due to impact from Johnson & Johnson Pte. Ltd’s pre-termination).

Our FY18 and FY19 DPU forecasts are trimmed by 0.3% and 2.6%, respectively, resulting in a revised fair value estimate of S$1.92 (previously S$1.93). Given that MIT’s share price has appreciated 14.3% YTD and 20.1% since our upgrade on 24 Nov last year, we believe upside potential is now limited at this juncture. Hence, we downgrade MIT from ‘Buy’ to HOLD on valuation grounds. Our projected FY18F distribution yield of 6.3% comes in approximately 1.5 standard deviations below its 5-year mean of 6.8%.

Source: OCBC Research - 26 Jul 2017