3QFY24: Weathering Near-term Headwinds From China
3QFY24 results was a mixed bag. MLT generated healthy rental reversions of 3.8% driven by Singapore, Australia and South Korea, despite the drag from China. Portfolio occupancy slipped 1.0ppt qoq to 95.9% due to non-renewals at older specifications properties in Singapore and Hong Kong. Management cautioned that weakness for China could persist for the next 6-12 months. MLT provides FY25 distribution yield of 5.3% (FLT: 6.5%). Maintain BUY. Target price: S$1.98.
RESULTS
• Mapletree Logistics Trust (MLT) reported DPU of 2.253 S cents for 3QFY24 (+1.2% yoy), which is above our expectation. The results included distribution of divestment gains of S$12.4m.
• Held back by strong Singapore dollar. Gross revenue and NPI grew 2.1% and 1.5% yoy respectively in 3QFY24 with higher contribution from existing properties in Singapore and contributions from acquisitions in Japan, South Korea and Australia completed in 1QFY24. The results were weighted down by depreciation of the Chinese yuan (-4% yoy), Japanese yen (-8% yoy), Malaysian ringgit (-6% yoy) and South Korean won (-4% yoy) against the Singapore dollar. On a constant currency basis, gross revenue and NPI would have grown by a stronger 4.8% and 4.1% yoy respectively.
• Portfolio occupancy eased 1.0ppt qoq to 95.9% in 3QFY24. MLT saw lower occupancy of 96.7% for Singapore (-1.7ppt qoq) and 95.6% for Hong Kong (-3.2ppt qoq) due to lease expiries at older specifications logistics properties slated for divestments. Occupancy for Malaysia declined 3.2ppt qoq to 96.5% after MLT repossessed vacant space to be backfilled by 4QFY24. Australia, India and Vietnam maintained full occupancy.
• Strong reversions from Singapore and Australia cushioned negative impact from China. MLT achieved positive rental reversions of 3.8% on a group-wide basis in 3QFY24 (Singapore: 9.1%, Australia: 7.5%, Vietnam: 5.1%, South Korea: 3.6% and China: -9.4%). In China, Tier 1 cities saw positive rental reversion of 2% but Tier 2 cities suffered with negative reversion of 17%. Excluding China, MLT clocked positive rental reversion of 6.2%. Management expects weaknesses from China to persist for another 6-12 months.
• Prudent capital management. Aggregate leverage was stable at 38.8% as of Dec 23. Proceeds from the divestment of properties in Malaysia and Singapore and cash retained via the Distribution Reinvestment Plan were utilised to repay higher-cost loans. Average cost of debt was maintained at 2.5% in 3QFY24. Borrowing costs are expected to rise as expiring interest rate swaps are replaced at higher interest rates. Management expects cost of debt to reach 2.7% by 4QFY24 and 2.9% by 4QFY25.
STOCK IMPACT
• Stability from geographical diversification. Outlook is clouded by geopolitical uncertainties and tight financial conditions. Rental rates across most of MLT’s markets are expected to remain stable despite economic slowdown. Unfortunately, rental reversion in China is likely to remain negative in the near term.
• Repositioning towards modern logistics properties near population centres. MLT will focus on rejuvenating its portfolio towards modern and high-specs logistics properties. Management intends to expand in growth markets, such as Malaysia, Vietnam and India. Hong Kong and Japan are attractive due to tight supply, especially at prime locations. Australia and South Korea have experienced cap rate expansion but capital values remain elevated. MLT has just deepened its presence in India with the proposed acquisition of a modern Grade A warehouse in Farukhnagar, Delhi for Rs900m (S$14.5m). The property is fully leased to one of the largest third-party logistics players in India for eight years.
• Acquisitions primarily funded by divestments. MLT will divest properties with older specifications and limited redevelopment potential. It has executed eight divestments worth S$207m in 9MFY24 at an average premium of 13% above valuation (Singapore: 2, Malaysia: 5 and Japan: 1).
• Consumer confidence remains weak in China. Consumer spending is weighted down by negative wealth effect caused by falling prices in the residential property market and stock market. Management expects demand to be soft over 6-12 months. Management expects negative rental reversion at high single digits to low teens. Occupancy was stable at 93.1% 3QFY24 (Tier 1: 91% versus Tier 2: 93%).
EARNINGS REVISION/RISK
• We raised our FY25 DPU forecast by 2% after factoring in higher distribution of divestment gains as MLT steps up its divestments.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$1.98 is based on the Dividend Discount Model (cost of equity: 6.75%, terminal growth: 2.8%).
SHARE PRICE CATALYST
• Accretive acquisitions to rejuvenate and reposition towards modern specifications logistics facilities, domestic consumption and e-commerce.
• Positive contributions from redevelopment projects in Singapore and Malaysia.