(+) DPU dipped 9.8% y/y, -2.2% q/q to 4.095 Scts, c.49.5% of our full-year estimates. Mapletree Logistics Trust (MLT) reported a steady set of results with 1HFY25 DPU of 4.095 Scts (-9.8% y/y), forming 49.5% of our full-year estimates. Excluding divestment gains, core DPU was 7.9% lower y/y at 3.861 Scts. The overall underlying performance remained stable with gross revenues and net property income coming in 1.1% and 1.5% lower y/y at SGD365mn and SGD315.3mn, respectively. This was due to lower contribution from China, divestment activities, and currency weakness (JPY, KRW, CNYT, and VND) vs. the SGD. The drop was mitigated by contributions from acquisitions in Singapore and Australia. On a constant-currency basis, gross revenues and net property income would have risen by 1.0% and 0.5% y/y, respectively. 

Our view

(+) Financial metrics have remained stable despite rise in global interest rates. 

The MAS leverage ratio inched slightly higher to 40.2% (+0.6% q/q), with the (debt + perpetual)/asset ratio increasing slightly to 44.6%, as the manager took on more debt to fund recent acquisitions. We note that while these levels have inched higher in recent quarters, they are still within management’s acceptable range. Overall interest cost remained steady at 2.7% (+0.2% q/q, flat y/y). Through active management of the REIT’s expiry profile and debt currency mix, and despite the overall increase in interest rates, MLT was able to control its overall interest burden. Looking ahead, management expects the overall cost of debt to still rise as hedges roll off during 2024 but still stay within 3.0%, which is within our projections. 

As such, T12M EBITDA adjusted interest coverage ratio (ICR) including perpetual interest remains stable and comfortable at 3.0x (vs. 2.97x a quarter ago). Looking ahead, given the rise in interest rates, EBITDA ICR ratio is likely to remain at current levels. 

(+) China operations in focus; overall portfolio metrics remain positive.   

The manager has continued to focus on keeping overall occupancy levels high and has been able to maintain it close to c.96%, with a q/q improvement seen in Hong Kong (97.7%, +2.1% q/q) and Korea (96.1%, +0.5% q/q), which is the right strategy to drive higher overall cash flow, in our view. We do note that reversions for China have declined by c.12% in the quarter, a slight deterioration compared to a quarter ago but in line with previous guidance of between -10% to -15%. Apart from China, its other markets continue to power ahead, with Singapore (+12.5%), Vietnam (+4.1%), India (+4%), and Malaysia (+2.9%) leading the pack. As 44% of the leases renewed in 2QFY25 are from China, it pulled down the average rental reversion rate to -0.6% (vs. +2.6% a quarter ago).

Looking ahead, the manager is still seeing positive rental reversionary growth but is guiding for lower growth, as tenants and businesses are taking a more cautious approach towards their expansionary strategies. 

(+) Active asset and capital management the key to success 

MLT continues to diversify its earnings base through active acquisitions. Year-to-date, it has completed acquisitions valued at close to c.SGD220mn and injected c.SGD370mn into active asset redevelopment in Singapore and Malaysia. These efforts would drive an upside to DPUs and NAVs over time. To fund these initiatives, MLT will look to recycle capital through the divestment of assets that are close to the end of their asset life cycle. The target is to divest assets worth SGD200-500mn in FY25. We note that the REIT has achieved a divestment premium of c.12% historically and aims to maintain this level for future divestments. 

Cutting estimates. 

Our estimates are tweaked slightly in FY25-26F to account for a higher share base. Given that interest rates are expected to be on a downtrend, our DBS economists are expecting a further 200bps in cuts in the Fed Funds rate till the end of 2025. Thus, we have also cut our interest rate assumption to assume a more normalised interest rate trajectory in later years. This brings our revised FY25-27F DPU to 8.1-8.5 Scts, implying a yield of >6.0%. 

Affected by external factors, BUY, TP SGD1.75.

MLT’s share price currently trades at a prospective FY25-26F yield of c.6% due to rising concerns over MLT’s China (c.20% of revenue) and Hong Kong (c.16% of revenue) operations, given the more subdued operating environment. These concerns are not new but are largely unfounded, especially for Hong Kong, where overall operating metrics remain resilient. That said, MLT has exposure to developed markets in Singapore, Japan, Australia, and Asia Pacific (ex-China), where the outlook remains robust with the sector currently favouring landlords. In the event of a global slowdown, we expect increased positioning into sectors that can navigate economic downshifts, and MLT is well placed to deliver attractive total returns at the current level. BUY, TP SGD1.75.   

Source of all data: Company, DBS