Analysts from CGS-CIMB Research, Citi Research, DBS Group Research, Maybank Securities, OCBC Investment Research and UOB Kay Hian are keeping their “add” or “buy” recommendations on Mapletree Industrial Trust (MINT) after the REIT posted a strong set of results for the 1QFY2023 ended June on July 25.
Of the six brokerages, DBS, Maybank Securities, Citi Research and UOB Kay Hian have kept their target prices of $ 3.05, $3.00 and $3.15, and $3.36 respectively.
On the other hand, CGS-CIMB lowered its target price from $3.08 to $2.97, while OCBC Investment Research cut its fair value estimate from $3.05 to $2.91.
During the quarter, the REIT reported a distribution per unit (DPU) of 3.49 cents, up 4.2% y-o-y.
MINT’s distributable income for the 1QFY2023 grew by 11.4% y-o-y to $92.1 million.
The REIT’s revenue stood 31% up y-o-y at $167.8 million, while its net property income (NPI) grew by 24% y-o-y to $129.9 million, up 24% y-o-y. The higher revenue and NPI came as the REIT booked contributions from its newly acquired data centres in the US.
MINT also reported a better occupancy of 95.3% for 1QFY2023, up from 94% in the preceding quarter, and also reported that it was able to achieve positive rental revisions across its portfolio in Singapore.
That said, the analysts from all six brokerages have expressed their concern on MINT’s “headwinds” in the coming quarters due to the inflationary environment and higher interest rates.
In its results statement, MINT’s management indicated that higher utility costs would likely impact the REIT’s margins as its contracts were renewed towards the end of the 1QFY2023.
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Tham Kuo Wei, CEO of the REIT’s manager, also warned that despite the improvement in the operational performance of its portfolio in Singapore and the US, MINT is expecting to see headwinds in the form of inflationary pressure, which could possibly lead to higher operating and finance costs.
Revised target price due to higher cost of capital: CGS-CIMB
In her report, CGS-CIMB analyst Lock Mun Yee explains that her revision of the target price was due to a higher forecasted cost of capital, which has been raised to 7.49% from 7.21% previously.
“We estimate the increase in utility cost could amount to [around] 2-3% of NPI margin per quarter and have reflected this in our current projections,” says Lock.
Her DPU estimates remain unchanged for the FY2023 to FY2025.
OCBC also lowers TP due to potentially higher cost of capital; notes MINT’s financial position is still ‘healthy’
OCBC’s research team has also cited MINT’s cost of capital when explaining their lowered target price, even if the REIT’s results for the quarter met the team’s expectations.
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Further to its report, the OCBC team notes that MINT’s financial position is still healthy, which is another plus to its outlook.
MINT reported an aggregate leverage ratio at 38.4%, as at June 30, with only 13.2% and 5.9% of its debt maturing for the remaining three quarters of FY2023 and FY2024, respectively.
About 72.3% of its debt has been hedged with a long weighted average hedge tenor of 4.2 years, thus helping to mitigate interest rate increases.
“That said, we see the need to trim our FY2023 and FY2024 DPU forecasts slightly by 0.4% and 1.1%, respectively, on higher interest costs,” the team writes.
They have also raised the cost of equity assumption from 6.5% to 6.7%, due largely to a higher risk-free rate assumption of 3.25%.
“Although the macroeconomic outlook remains uncertain, MINT’s solid financial position, high quality management team and strategy of scaling up its data centre and hi-tech exposure would allow it to better withstand the uncertainties ahead, in our view,” the team concludes.
MINT to see ‘full impact’ on high energy costs in 2QFY2023: DBS
The team at DBS has also noted the impact of high energy costs for MINT, forecasting that the REIT will see a “full impact” in which margins will be negatively affected during the 2QFY2023 when utility contracts are due for renewal in June.
“Utility costs as a percentage of revenues are estimated at [around] 1% of revenues and is projected to increase by 2x-3x when the contracts come due, to $10 million – $12 million a year, which we have factored in for FY2023,” says the DBS team.
“We believe that expectations of an economic slowdown has brought attention towards the industrial S-REITs in the near term, where we have observed a relative outperformance compared to other subsectors,” the team adds. “We believe that income visibility and strong financial metrics, which defends MINT’s DPU against interest rate risks, is a valued trait not priced in fully. MINT currently trades at 1.4x P/NAV with a forward yield of 5.2%, above its mean.”
Data centre fundamentals still positive, says UOB Kay Hian
The potential of higher costs thanks to the inflationary environment and higher interest rates was also a concern pointed out by UOB Kay Hian analyst Jonathan Koh.
That said, Koh notes that MINT’s triple net leases accounted for all leases for data centres in Singapore and 90.2% of leases for data centres in North America. This means that the higher cost of electricity does not have a material impact on MINT’s portfolio of data centres, he says.
However, MINT’s multi-tenant buildings in Singapore are more affected, with the REIT’s management estimating that operating expenses would increase by $10 million to $12 million if electricity costs increase from the current $0.15 per kilowatt hour (kWh) to $0.40-0.45 per kWh, a point Koh shares with his counterparts at DBS.
In addition, Koh notes that management raised service charges by 10% in July, which could partially mitigate the inflationary impact of the higher cost of electricity.
On a broader sector view, Koh sees that the fundamentals for data centres remain positive.
“Data centres have diversified sources of demand with future growth driven by emerging technologies, such as 5G, artificial intelligence (AI) and social media, including virtual reality communities and the metaverse,” he says. “Inventory bottlenecks are likely to trigger rental rate increases as demand grows in power-constrained markets, such as Silicon Valley and Northern Virginia.”
The growth of enterprise data will create large data stores, and leased data centres provide a secure infrastructure to store these data at a low cost.
According to global research and advisory firm 451 Research, revenue for the North America leased data centre market is forecast to expand at a CAGR of 7% from 2020 to 2026 to reach US$24 billion, he adds.
This is something CGS-CIMB’s Lock agrees with, saying that she continues to “like MINT’s portfolio diversification strategy into new economy assets.”
Citi likes MINT for ‘resilient income stream’ despite inflationary caveats
To Citi Research analyst Brandon Lee, MINT’s results for the quarter also came in line with expectations, with its figures painting a “solid operational performance picture”.
Yet, he also notes the REIT’s lower NPI margins, which “could explain management’s caution on [the REIT’s] rising operating expenditures (OPEX)”. The headwinds in the coming quarters due to inflation doesn’t augur well for the REIT’s outlook even if its rent reversion remained positive for the third straight quarter, explains Lee.
“We also think sizeable industrial completions in 2022 (+5.4%) could partially derail its decent run of positive rent reversion over the past few quarters,” he writes.
“MINT's emphasis on proactive rejuvenation and rebalancing suggest to us that it will build on its two earlier divestments by selling low value-added industrial buildings (i.e. flatted factories and light industrial) in SG, as well as US data centres with lower occupancy, with potential return of divestment gains (similar to 26A Ayer Rajah Crescent) a share price catalyst,” he adds.
In his report, Lee notes that MINT has outperformed the general Singapore REITs (S-REITs) sector.
“We continue to like [MINT] for its resilient income stream,” he says.
That said, the analyst is expecting the REIT’s share price reaction to remain “muted” given its “in line” results.
MINT’s valuations ‘undemanding’: Maybank
Maybank Securities analyst Chua Su Tye sees MINT’s valuations at its current share price as “undemanding” at a yield of 5%.
This, he says, is backed by improving fundamentals from better occupancies, recovering industrial rents and higher DPU visibility from its rising data centre tenancies.
On the REIT’s results, which were in line with consensus and slightly above his estimates, Chua has raised his DPU estimates by 1% to 2% on stronger occupancies and rents.
“Growth headwinds from inflationary pressures and rising interest rates are partly offset by retained capital distributions, and a strong balance sheet,” he says.
Chua has, however, lowered his NPI margin estimates into the coming quarters on the back of the cost escalation.
In his report, Chua sees MINT’s DPU as being cushioned from the rising rates, noting its stable gearing and strong balance sheet.
“We expect higher base rates (of 100 basis points or bps), with a 50 bps increase in interest rates lowering DPUs by [less than] 1%,” he writes. “Cap rates for data centre assets remain tight, according to management, and as such we see low visibility on third-party acquisition
opportunities in the near term.”
In addition, MINT’s DPUs “should be supported by contributions from on-going redevelopment projects and asset enhancement initiatives (AEI), and contribution from the various US data centres acquisition from 3QFY2018”.
As of 12.45pm, units of MINT were trading at $2.71, at a FY2023 P/B ratio of 1.4x and dividend yield of 5.1%, according to UOB Kay Hian.
