• 1QFY20 DPU +3.3% YoY
• Conditions may bottom out soon
• Transformation continues

1QFY20 results within expectations; DPU grew 3.3% YoY

Mapletree Industrial Trust (MIT) reported its 1QFY20 results which met our expectations. Gross revenue and NPI jumped 8.8% and 12.2% YoY to S$99.6m and S$77.9m, respectively. DPU of 3.10 S cents represented growth of 3.3% YoY and constituted 24.4% of our FY20 forecast.

Rental reversions were weak, but may bottom-out soon

Operationally, MIT’s portfolio occupancy improved 0.6 ppt QoQ to 90.8% (Singapore: +0.7 ppt to 90.5%; US: unchanged at 97.4%). Management is very close to securing a new medical devices tenant, which would move its business park segment occupancy from 79.3% to ~85% if successful. Rental reversions were weak for renewal leases in 1QFY20, with all segments recording negative rental reversions. While this drag may continue into 2QFY20, MIT is optimistic that conditions may bottom out soon, with the possibility that rental reversions may be flattish to even positive in 3QFY20. This is likely due to more manageable supply and a lower rental base effect. However, downside risks from the subdued macroeconomic backdrop remains.

Continues to scale up value chain; positive long term growth prospects

MIT recently announced a redevelopment project for its Kolam Ayer 2 cluster, which would result in two flatted factories and an amenity centre being redeveloped into a new hi-tech building at an estimated project cost of S$263m. Targeted yield on cost is high at ~8%. We believe this project is another reflection of MIT’s strong track record of improving its portfolio and scaling up the value chain. Another area of focus is on data centres.

While MIT previously highlighted in Sep 2017 that overseas data centre properties may comprise up to 20% of aggregate value of its AUM, management believes it is worthwhile to potentially bring this exposure up to 30% in the medium term as it is looking for opportunities in the US, Europe and Asia. This would provide room for more robust secular growth, in our view, although cap rates have compressed 50-100 bps since MIT made its maiden US data centre portfolio acquisition.

We bump up our fair value on MIT from S$2.06 to S$2.29 after factoring in a lower cost of equity assumption of 7.4% (previously: 7.7%) and higher terminal growth rate of 1.5% (previously: 1.2%).

Source: OCBC Research - 25 Jul 2019