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DBS, UOBKH and CGS-CIMB analysts keep 'buy' and 'add' calls on Mapletree Industrial Trust, Citi remains 'neutral'

This follows the REIT’s 2QFY2023/2024 ended Sept 30 results with “healthy gearing” and robust rental reversions, say analysts.

Analysts at DBS Group Research, UOB Kay Hian (UOBKH) and CGS-CIMB Research are keeping their “buy” and “add” calls on Mapletree Industrial Trust Me8u (MINT), following the REIT’s 2QFY2023/2024 ended Sept 30 results.

Both DBS and CGS-CIMB have unchanged target prices of $2.60 and $2.61 respectively, while UOBKH and Maybank Securities have lowered their target prices to $2.69 from $2.74 and from $2.30 to $2.15. Meanwhile, Citi Research analysts have maintained their “neutral” call with a target price of $2.36.

MINT reported a 0.8% y-o-y decline in revenue for the 2QFY2023/2024 to $174.1 million due to weakening of the US dollar and loss of income from non-renewal of leases. While distribution to unitholders grew by 3.5% y-o-y to $94.1 million, the quarter’s distribution per unit (DPU) of 3.32 cents was 1.2% lower y-o-y due to an expanded unit base following MINT’s private placement exercise in June 2023.

Lock Mun Yee and Natalie Ong of CGS-CIMB say that MINT’s DPU for the 2QFY2023/2024 and 1HFY2023/2024 was within their expectations, at 24.2%/48.9% of their FY2024 forecast.

Lock and Ong highlight that MINT has achieved robust rental reversions for its Singapore portfolio with an average reversion of 8.8%. This is despite portfolio occupancy slipping 0.1% percentage points (ppts) q-o-q to 93.2% in 2QFY2024, as occupancy rates in Singapore dipped slightly, they add.

“Looking ahead, MINT has 7.6%/15.5% of its gross rental income to be renewed in 2HFY2024/FY2025, mainly from its Singapore flatted factories and hi-tech buildings and US data centres,” the analysts note. The REIT is currently in talks with a potential replacement tenant at one of its US data centres.

With the acquisition of the Osaka data centre completed at end-September 2023, Lock and Ong anticipate the property to contribute accretive to earnings in 2HFY2024.

Lock and Ong say that the REIT has healthy gearing, as its aggregate leverage stood at 37.9% as at end-2QFY2024. All-in funding cost was lower q-o-q at 3.2%, with the inclusion of yen loans taken to finance the Osaka data centre purchase, while its adjusted interest coverage ratio stood at 4.3 times.

The analysts believe that funding costs could rise over FY2024 to FY2025, as existing debt is being repriced at the current higher market rates.

However, they note that MINT will look to continue its portfolio rebalancing efforts through accretive acquisitions and selective divestments of non-core assets. It has earmarked up to $1 billion of assets that it could potentially recycle; but this would be done selectively and unlikely at distressed or at steep discount to book values.

“In terms of acquisitions, MINT indicated that while current prices of data centres are lower than two years ago, pricing is still tight when compared to current funding levels,” they say. “In addition to data centres, MINT highlighted that it may also look at hi-tech properties catering to R&D and life sciences.”

Likewise, Dale Lai and Derek Tan of DBS acknowledge that MINT has been strengthening its defences as interest rates bite. With its “strategic pivot” to invest in data centres which now form close to 50% of its assets, the analysts say that MINT is one of the largest new-economy REITs in Singapore.

Despite also recognising the REIT’s steady gearing and rental reversions, Lai and Tan note that MINT is fast approaching the phased expiry of AT&T’s lease in the coming two years. The lease contributes about 5.1% of gross rental income as of Sept 2023, and two out of three data centres will be progressively returned to MINT in FY2024.

“The manager remains in advanced negotiations with a replacement tenant to take up one space,” they say. “The downtime from higher vacancy rates have been priced in our estimates.”

The DBS analysts note that while investors will likely focus on near term risk factors from the expiry of the AT&T lease, they believe this has been well flagged out and priced into estimates. A positive catalyst will come from the ability to re-let the vacant space in order to reduce the near-term downtime in earnings, they add.

“We maintain our buy call on MINT and target price of $2.60, as we like MINT for its attractive FY2024-FY2025 yields of about 6.1%,” say Lai and Tan.

Similarly, UOBKH’s analyst Jonathan Koh notes that the cost of debt is expected to increase slightly in FY2025 due to replacement of expiring interest rate swaps. After fine-tuning his assumption for cost of debt, the analyst has trimmed his FY2025 DPU forecast by 3.5%.

Koh notes that the REIT’s outlook is clouded by geopolitical uncertainties and tight financial conditions. However, it is on the lookout for data centres to acquire, as it has the right of first refusal from the sponsor Mapletree Investments to acquire the remaining 50% stake in their second data centre.

He says that MINT is also exploring the feasibility of recycling assets in Singapore to finance its expansion for data centres in Japan, and he likes MINT’s ongoing expansion to acquire
data centres in Japan coupled with asset recycling in Singapore.

“This brings MINT closer to being a pure play on data centres,” says Koh. “Tapping on funding in Japanese yen will also reduce its cost of debt.”

The UOBKH analyst’s target price of $2.69 is based on the dividend discount model (DDM).

Finally, Citi analyst Brandon Lee notes that higher debt expenses had offset the REIT’s divestment gains in 2QFY2024/2025. However, Lee sees a slight positive share price impact on earnings beat and better-than-expected positive reversion in Singapore.

“Our 12-month target price of $2.36 is derived from an average of DDM and revised net asset value (RNAV) valuations,” says Lee.

Lee has made three assumptions in his DDM valuation — a risk-free rate of 3.5%, overall cost of equity of 7.6% and terminal growth of 2.15%. He has not factored in any potential earnings accretion or dilution from any unannounced acquisitions. Meanwhile for RNAV, he values MINT’s properties at a weighted average cap rate of 6.3%.

Two upside risks on his investment thesis on MINT include a sharp fall in interest rates, which could lower the cost of debt and increase MINT’s DPU and decrease its cost of capital, and any sharp improvement in economic activity could raise demand for industrial property space and hence improve the occupancy and rental rates of MINT’s properties.

On the other hand, he says key downside risks to his investment thesis would include a sharp increase in interest rates and sharp decline in economic activity, which would impact DPU and valuations.

“If either of the above-mentioned risk factors has a greater upside or downside impact than we anticipate, respectively, the share price will likely have difficulty attaining our target price,” Lee adds.

Units in MINT are trading 1 cent higher or 0.47% up at $2.14.

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