• Downgrade to HOLD from Add with a higher DDM-based Target Price of S$1.48 due to steep valuations at +1 s.d. above historical average and risk of tenant default.
• CWT made up 9.2% of revenue and its possible default could be an overhang on the stock price.
• Mapletree Logistics Trust's 4Q19 DPU of 2.024 Scts was broadly in line at 27%/26% of our/consensus forecasts, driven by completed redevelopments and accretive acquisitions

Downgrade to HOLD With S$1.48 Target Price as Valuations Appear Stretched

• We downgrade MAPLETREE LOGISTICS TRUST (SGX:M44U) to HOLD due to high valuations of 1.3x P/B and 5.4% yield (historical averages of 1.1x and 6.6%, respectively) and the risk of large tenant default.
• We think the +17.5% YTD Mapletree Logistics Trust share price gain has fully priced in an expected improvement in the Singapore industrial property market in 2019.
• We tweak our forecasts to include the impact of the Japan divestment and lower our risk-free and terminal growth rates to account for the more dovish interest rate sentiment. Further de-rating catalysts would be the actual default of CWT while upside risk could be accretive acquisitions.

CWT Tenancies Could Cause An Overhang

• CWT contributed to 9.2% of gross revenue from the five ramp-up properties in Singapore bought in Jul 18. While CWT continues to pay rents, Mapletree Logistics Trust currently holds security deposits of six months of rental in relation to these leases.
• We understand that about 1/3 of the space is taken up by end users and there are plans to novate these underlying leases over to Mapletree Logistics Trust. For the remaining space, Mapletree Logistics Trust mentioned that it has received enquiries from other third-party logistics providers. We have not assumed a default and this represents a key downside risk to our call.

Exiting 5 Properties in Japan But Could Redeploy Funds to New Ones

• During the quarter, Mapletree Logistics Trust divested 5 properties in Japan for S$213.3m. This is 21% above the latest appraised value of S$175.7m and divestment proceeds could be recycled into new acquisitions, reducing debt or other general purposes. Post-divestment, aggregate leverage declined to 36.2% from 37.7%.
• The divestment gain could be distributed to unitholders and we have factored this into our forecasts. We also think that some of the divestment proceeds could be recycled into newer Japanese assets developed by the Sponsor in due course.

Mapletree Logistics Trust's 4Q19 Results in Line Due to New and Redeveloped Assets

• Mapletree Logistics Trust's 4Q19 DPU of 2.024 Scts (+4.5% y-o-y) was in line, forming 26.7%/25.7% of our/consensus FY3/19 forecasts. This came from 13.0% y-o-y growth in revenue due to redevelopments and accretive acquisitions but was partially offset by two divestments.
• Portfolio occupancy was higher at 98.0% (97.7% in 3Q19) while rental reversion was +2%. Borrowing costs increased 37.4% y-o-y due to incremental borrowings to fund acquisitions.
• Mapletree Logistics Trust's FY19 DPU of 7.941 Scts (+4.2% y-o-y) was broadly in line at 104.7% of our forecasts.

Source: CGS-CIMB Research - 27 Apr 2019