• MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) reported DPU of 3.13 S cents for 2QFY20, up 4.0% y-o-y, driven by new revenue contributions from 18 Tai Seng Street (acquisition), 30A Kallang Place (enhancement) and Mapletree Sunview 1 (built-to-suit data centre). The acquisition of 13 data centres in the US and Canada increases Mapletree Industrial Trust’s exposure to high-tech buildings from 43.5% to 52.9% of AUM and adds three top-10 US technology companies as tenants.
• We see value in Mapletree Industrial Trust as entry into high-growth from data centres at a reasonable price.
• Maintain BUY. Target price: S$2.90.

2qfy20 Results

• Mapletree Industrial Trust (SGX:ME8U) reported DPU of 3.13 S cents for 2QFY20, up 4.0% y-o-y. See Mapletree Industrial Trust Announcements.
• Results are in line with our forecast DPU of 3.18 S cents.
• Advanced distribution of 2.93 S cents for the period 1 Jul 19 to 25 Sep 19 was paid on 21 Oct 19. The balance of distribution for the period 26 Sep 19 to 30 Sep 19 is 0.20 S cents.

Growth from new buildings.

• Gross revenue and net property income grew 10.5% and 13.3% y-o-y respectively, driven by new revenue contributions from 18 Tai Seng Street (acquisition), 30A Kallang Place (enhancement) and Mapletree Sunview 1 (built-to-suit data centre). Its 40% stake in 14 data centres in the US contributed earnings of S$4.5m.

Focused on maintaining occupancy.

• Mapletree Industrial Trust's average portfolio occupancy for 2QFY20 was 90.5%, edging slightly lower by 0.3ppt q-o-q. The Singapore portfolio occupancy was 90.2% (down 0.3ppt q-o-q). Average occupancy for business park buildings has improved 2.6ppt q-o-q to 81.9%.
• Mapletree Industrial Trust has secured a new tenant for 10% of NLA at The Strategy, which will improve committed occupancy for business park buildings to 85%. Its US portfolio occupancy remained unchanged at 97.4%. The weighted average lease expiry increased q-o-q from 3.4 years to 3.6 years.

Completed upgrading of 7 Tai Seng Drive.

• Mapletree Industrial Trust has completed the upgrading of 7 Tai Seng Drive as a data centre on 3 Jul 19. The seven-storey data centre with GFA of 256,600sf has been fully leased to Equinix Singapore for 25 years from 20 Jul 19.

Strong balance sheet.

• Aggregate leverage ratio receded 4.2ppt q-o-q to 29.2% after utilising part of proceeds from an equity fund raising to repay debts. Weighted average cost of debt improved 0.1ppt q-o-q to 2.9%. Interest coverage remained healthy at 6.6x.

Stock Impact

High-tech transformation powered by data centres.

• Mapletree Industrial Trust and sponsor Mapletree Investments have formed a 50:50 JV to acquire 10 powered base building data centres for US$557.3m (JV holds 100% stake) and three Turnkey hyper-scale data centres for US$810.6m (JV holds 80% stake, vendor Digital Realty holds 20% stake). The total transaction value is US$1,367.9m (S$1,900.3m), of which Mapletree Industrial Trust’s share is US$683.9m (S$950.2m).

Continued shift in asset mix towards high-tech buildings and data centres.

• All properties are 100% leased to nine established tenants with a long weighted average lease expiry (WALE) of 9.1 years (by gross rental income). Three of top-10 US technology companies contribute 51.7% of gross rental income. 92.2% of leases have fixed annual rental escalations of 2% or more. The acquisition increases Mapletree Industrial Trust’s exposure to high-tech buildings from 43.5% to 52.9% of AUM. The exposure to data centres expands from 17.7% to 31.5% of AUM (Singapore: 7.2%, US & Canada: 24.3%).

Acquisition is DPU-accretive.

• The portfolio of data centres provides an initial NPI yield of 6.1% (powered base building data centres: 6.6%, turnkey hyper-scale data centres: 6.0%). The transaction is expected to increase pro forma DPU and NAV by 3.5% and 3.3% in FY19 respectively.
• Mapletree Industrial Trust has completed a private placement to issue 176.6m new units at S$2.265 each to raise S$400m to finance the acquisition.

Growth from data centres at a reasonable price.

• Mapletree Industrial Trust’s 2020F distribution yield of 5.0% is higher than the 3.9% for KEPPEL DC REIT (SGX:AJBU).
• See Mapletree Industrial Trust Dividend History; Keppel DC REIT Dividend History.

Earnings Revision / Risk

• We forecast DPU of 12.6 S cents for FY21, 12.4 S cents for FY22 and 12.8 S cents for FY23.

Valuation / Recommendation

• Maintain BUY and raise our target price to S$2.90, based on DDM (required rate of return: 6.0%, terminal growth: 1.8%). We lower our risk-free rate from 2.5% to 2.0% due to persistently low interest rates.
• See Mapletree Industrial Trust Share Price; Mapletree Industrial Trust Target Price.

Share Price Catalyst

• Growth from data centres in Singapore and the US.
• Acquisition of the remaining 60% stake in the portfolio of 14 data centres (first JV) and 50% stakes in portfolio of 13 data centres (second JV) from Mapletree Investments.

Source: UOB Kay Hian Research - 24 Oct 2019