1Q19 in Line; DPU Growth Visibility; BUY

• Mapletree Industrial Trust's 1Q19 DPU of S3.00cts, up 2.7% y-o-y, was in line with our estimates though ahead of the Street’s. This was driven by its rising hi-tech segment contribution even as Singapore occupancies dipped slightly on earlier supply pressures. 
• Leasing demand remains strong, with growth visibility from completed Kallang AEI, and backed by a more resilient portfolio following hi-tech asset investments and US diversification in 4Q17. 
• Low gearing, SGD700m of debt headroom and clear acquisition potential should provide upside to our 3-year 6.3% DPU CAGR forecast. We keep DPU and DDM-based SGD2.25 Target Price (WACC 7.2%, LTG 1.5%) unchanged. BUY.

Hi-tech Contributions Offset for Lower Occupancies

Revenue and NPI rose y-o-y and q-o-q from HP build-to-suit (BTS) properties and Mapletree Industrial Trust (MINT)’s 40% interest in 14 US data centres acquired in Dec 2017. Portfolio occupancy dipped q-o-q from 90.0% to 88.3%. 

While occupancy for its US portfolio was unchanged at 97.4%, Singapore occupancies dipped from 89.6% to 87.8% with higher vacancies across most segments. Management attributed this to a large industrial supply and an uneven recovery in the manufacturing sector, even as its average passing rents rose 0.5% q-o-q and 3.6% y-o-y. 

Pre-commitments at 30A Kallang Place after AEI rose to 43.8% from 40.2% as at end Mar-2018. They could increase another 20% if tenancies under negotiation firm up. Negative reversions of 5.2% / 3.0% persisted at its older flatted factories / business parks, given slow backfilling of the remaining Johnson & Johnson vacancy.

Pressing on With Acquisitions and BTS

Mapletree Industrial Trust (MINT) continues to eye acquisitions - mainly its sponsor’s 60% interest in the US data-centre portfolio and 18 Tai Seng in Singapore which has reached strong occupancy. Management also aims to expand its development/BTS projects in Singapore, to 1-2 a year. 

Divestment opportunities are less for MINT relative to its peers as its portfolio is concentrated in multi-tenanted properties, while demand has been biased towards single-user assets. 

Aggregate leverage increased to 35.0% as at end-June with its 7 Tai Seng acquisition, and we estimate SGD0.7-1.0b of debt headroom to support potential deals.

Swing Factors 

Upside 

• Earlier-than-expected pick-up in leasing demand driving improvement in occupancy. 
• Better-than-anticipated rental reversion trend. 
• Accretive acquisitions. 

Downside 

• Prolonged slowdown in economic activity could reduce demand for industrial space, resulting in lower occupancy and rental rates. 
• Termination of long-term leases contributing to weaker portfolio tenant retention rate. 
• Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations 

Source: Maybank Kim Eng Research - 25 Jul 2018