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Author: simonsg   |   Latest post: Wed, 13 Nov 2019, 11:56 AM

 

Mapletree Industrial Trust - High-Tech Transformation Powered by Data Centres; Upgrade to BUY

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  • Mapletree Industrial Trust’s strategy to grow its high-tech buildings segment is transformational. It has expanded exposure to high-tech buildings to 43.3% of portfolio valuation, much larger than flatted factories’ at 33.1%.
  • We view acquisitions to further increase exposure to data centres as a positive catalyst.
  • Mapletree Industrial Trust provides growth from data centres at a reasonable price. Its FY20F distribution yield of 5.5% is higher than 5.2% for Ascendas REIT (SGX:A17U) and 4.5% for Keppel DC REIT (SGX:AJBU).
  • Upgrade to BUY. Target price: S$2.58.

What’s New

Strategy to grow high-tech buildings.

  • MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) has reshaped its portfolio of investment properties. The high-tech buildings segment has expanded to 43.3% of portfolio valuation as of end-FY19, compared to 18.9% five years ago. This was achieved through:

Acquiring and developing high-tech buildings.

  • Mapletree Industrial Trust completed the development of 1 & 1A Depot Close in Jun 17 and 30A Kallang Place in Feb 18. It also completed the acquisition of 18 Tai Seng Street for S$271m in Feb 19.

Data centres accounted for 17.7% of portfolio valuation (Singapore: 8.6%, US: 9.1%).

  • Mapletree Industrial Trust broadened its investment strategy to include data centres on a worldwide basis beyond Singapore. It completed the acquisition of a 40% stake in 14 data centres located in the US in Oct 17. They sit on freehold land with total NLA of 2.3m sf. The portfolio has 15 quality tenants, including AT&T, Vanguard, General Electric, Level 3 Communications and Equinix. The portfolio provides an initial NPI yield of 6.9% and rental escalation of more than 2% annually. Mapletree Industrial Trust has the right of first refusal to acquire the remaining 60% stake from sponsor Mapletree Investments.
  • In Singapore, Mapletree Industrial Trust has developed two built-to-suit (BTS) data centres at 26A Ayer Rajah Crescent and 12 Sunview Drive and has embarked on an upgrading of a high-tech building to a data centre at 7 Tai Seng Drive (to start contributing from 3QFY20).
  • Conversely, exposure to flatted factories was reduced from 48.4% to 33.1%.

Keen to further expand data centre exposure.

  • The global leased data centre market is expected to grow at a CAGR of 6.5% between 2017 and 2023F, driven by:
    1. growth of cloud computing at CAGR of 16.1%,
    2. storage of data and content close to end-users and at multiple geographical locations for resiliency, and
    3. demand for backup data centres for disaster recovery, business continuity and compliance to data sovereignty regulations.
  • According to 451 Research, the US currently represents 32% of the global insourced and outsourced data centre space by operational sf.

Continuing fruitful partnership with sponsor.

  • Mapletree Industrial Trust intends to acquire more data centres located in gateway cities in the US, Europe and Asia. It is likely to partner sponsor Mapletree Investments to pursue larger scale portfolio transactions.
  • For single-asset transactions, Mapletree Industrial Trust would acquire the data centre by itself.

Embarks on largest redevelopment project at Kolam Ayer 2 Cluster.

  • Mapletree Industrial Trust plans to redevelop the Kolam Ayer 2 Flatted Factory Cluster into a high-tech industrial precinct at total cost at S$263m. The redevelopment will increase utilised plot ratio from 1.5 to 2.5 and expand GFA by 71% to 865,600sf. The property is located near Geylang Bahru MRT station (Downtown Line).
  • Mapletree Industrial Trust will build a 7-storey BTS facility with GFA of 211,000sf (24.4% of the enlarged GFA) for a global medical device company headquartered in Germany. The anchor tenant has committed to fully lease the building for 15 years with annual rental escalations. For the second block with GFA of 654,600sf, management targets high value-add and knowledge-based companies from advanced manufacturing and information & communications technology. The redevelopment is scheduled to commence in 2H20 and is expected to complete in 2H22.
  • Kolam Ayer 2 Cluster is a sizeable redevelopment project accounting for 4% of Mapletree Industrial Trust's total NLA. We expect the redevelopment project to have a negative impact in FY21 and FY22. We see DPU recovering by 2.8% to 12.8 S cents in FY23 as Kolam Ayer 2 Cluster starts to contribute.

Stock Impact

High-tech transformation powered by data centres.

  • The repositioning towards high-tech buildings and expanded exposure to data centres will help Mapletree Industrial Trust weather macro uncertainties and escalation in trade conflicts. We view acquisitions to further increase exposure to data centres as a positive catalyst.
  • Mapletree Industrial Trust aims to improve occupancies at the expense of negative rental reversions for the flatted factories segment, which is more affected by weakness for the electronics and precision engineering sectors.

Growth from data centres at a reasonable price.

  • Mapletree Industrial Trust’s 2020F distribution yield of 5.5% is higher than 5.2% for Ascendas REIT (SGX:A17U) and 4.5% for Keppel DC REIT (SGX:AJBU).

Earnings Revision / Risk

  • We forecast DPU of 12.7 S cents for FY20 and 12.6 S cents for FY21.

Valuation / Recommendation

  • Upgrade to BUY. Our target price of S$2.58 is based on DDM (required rate of return: 6.5%, terminal growth: 1.8%).

Share Price Catalyst

  • Growth from data centres located in Singapore and the US.
  • Acquisition of remaining 60% stake in portfolio of 14 data centres in the US.

Source: UOB Kay Hian Research - 13 Sep 2019

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