Mapletree Industrial Trust

Kim Eng on 11 June 2012

Background: Listed in Oct 2010 and sponsored by Mapletree Investments, a wholly-owned subsidiary of Temasek Holdings, Mapletree Industrial Trust (MIT) invests principally in income-producing real estate used for industrial purposes. As of 31 Mar 2012, its portfolio of 81 industrial assets has an appraised value of SGD2.7b and net leasable area (NLA) of 1.3m sqm. MIT has a tenant base of more than 2,000 MNCs, listed companies and local enterprises.

Why are we highlighting this stock? MIT’s pure-Singapore portfolio is stable with a reasonably strong occupancy rate of 94.9%, providing the trust with a steadfast income stream. The subpar rentals of its portfolio – 18-30% of its flatted factory rents are still below market rates – should also help lift revenue growth in the short term through increasing rents to market levels and reconfiguring its tenant mix to include high-growth sectors. In addition, the right of first refusal granted by Mapletree Investments would allow the trust access to its development capabilities.

Stable yield, steady growth. MIT’s current portfolio is well diversified with a reasonably strong occupancy rate of 94.9% and lease expiry profile of 2.5 years. Retention rate was strong at 76.1% in 4QFY11/12, providing the trust with a steadfast income stream. Performance should remain relatively stable given that 18-30% of its flatted factory rents are still below market rates (from our estimates) and 23.2% of topline is up for renewal in FY12/13.

Healthy financial metrics. MIT’s balance sheet is healthy with interest coverage ratio of 6.1x and aggregate leverage at 37.8%. This implies a comfortable debt headroom of SGD99-365m for additional growth initiatives based on guided target gearing levels of 40-45%. Its weighted average debt tenure is three years and ~85% of total borrowings of SGD1.07b have been hedged to fixed rates. Blended interest cost remained low at 2.3%.

Growth and risks. On a relative basis, forward yields of 7.4-7.6% in FY12/13-13/14 are still attractive in our view, backed by pure-Singapore assets, a diversified portfolio and a strong sponsor. Further upside may come from acquisitions, build-to-suit projects (MIT can undertake up to SGD270m of development activities) and asset enhancement initiatives. Key downside risks include (1) weaker-than-expected rental reversions, (2) management’s inability to grow the portfolio in the long run, and (3) rise in defaults and arrears ratio in the event of an economic downturn due to a high concentration of SME tenants.