Mapletree Industrial Trust - Price weakness presents attractive valuation
- Price has corrected c.6% post-Trump victory.
- Pricing-in of rate hike expectations, but valuations are attractive.
- Debt management profile is top in class.
- Near-term visibility of DPU growth from completion of BTS project.
- Accumulate on price weakness.
Upgrade to "Accumulate" rating with unchanged DDM valuation of S$1.74
- The price for Mapletree Industrial Trust (MINT) had corrected some 6% since 8 November, following a Trump victory and on higher expectations of a rate hike by the end of this year.
- There is near-term visibility for DPU growth, coming from the completion of the HewlettPackard build-to-suit (BTS) project, which is fully committed. Low gearing of 29.0% affords the firepower to make acquisitions with a debt headroom of $633mn based on 40% gearing, by our estimates.
Valuation is attractively low, notwithstanding a rate hike
- We had indicated on Page 16 of our initiation report (11 April 2016) that "MINT has historically never traded at a discount to its book value. The lowest P/NAV multiple it has ever traded to was 1.08x." We now derive a price floor at $1.48, based on historical low 1.08x multiple and current NAV of $1.37. We expect any further downside to be limited.
- Current relative valuation of 1.16x P/NAV, which is above 1 standard deviation below the historical average is attractive.
Higher expectations of rate hike, but MINT's debt management profile is top in class
- MINT has 2.8% of debt maturing in 2H FY17 and 17.4% in FY18. We refer to Page 7 of our recent report on the Industrial sub-sector (11 November 2016), which shows that as at end of September 2016, MINT has the lowest gearing, second-highest weighted average debt maturity and second-highest interest coverage ratio among the Industrial S-REITs.
FY18 lease expiry is a concern, but tenant retention has a good track record
- Portfolio weighted average lease expiry (WALE) stood at 2.8 years, as at end of September 2016. 6.8% of leases by gross rental income (GRI) will be expiring in 2H FY17. We currently view this as manageable against the backdrop of a challenging environment. However, FY18's 32.8% of leases by GRI expiring is a concern, as the current oversupply condition could persist until then.
- Of the leases expiring in FY18, about half of it comes from the Flatted Factories segment. The silver lining in all of this is that MINT has a track record of tenant retention that is higher than 60%, both at the portfolio level and for the Flatted Factories segment.
Peer relative valuation
- MINT is trading above the sector average P/NAV multiple and lower than the peer average 12M-trailing yield.