To The Moon

MLT reported its 3Q23 result yesterday after market hours.

Result highlights 

In 3Q23, MLT reported an 8% and 7.3% year-over-year increase in gross revenue and net property income (NPI) to S$180.2m and S$157.2m respectively, due to contributions from accretive acquisitions, partly offset by weaker currencies, and a slight decline in NPI margin.

DPU came in at 2.227 cents, representing a 1.9% increase YoY and a 0.9% decrease QoQ. This brought the 9M23 DPU to 6.743 cents, a 3.4% increase YoY and in line with the company's and market's expectations. 

MLT's guidance for FY24 is for borrowing costs to be between 2.9-3.0%, which is higher than its previous estimate of 2.7%. MLT's DPU estimate for FY24 is 3.9% lower than the market consensus.

MLT 3Q23 results

Asset fundamentals remained very solid

The portfolio occupancy improved slightly quarter-over-quarter to 96.9% as of the end of 3Q, led by Singapore, Japan and China, although Hong Kong SAR and South Korea saw a slight dip.

Portfolio Occupancy improved

Rental reversions in 3Q continue to be positive, albeit at a moderated average of +2.9% compared to +3.5% in 2Q. Above-average reversions came from South Korea, Vietnam, Hong Kong SAR, Singapore and Malaysia. About 7.5% of its rental income is up for renewal in 4QFY23. Management anticipates that rental reversions would likely remain positive, although it may moderate in China as the country slowly emerges from the impact of Covid-19. That said, occupancies in Tier-1 cities are still high, in excess of 95%

Additionally, valuations are expected to remain stable by the end of FY23, with cap rate expansion in Australia and Korea offset by strong rental growth and stable cap rates in the company's other markets.

Demand for e-commerce may has slowed, but remains positive as some operators have consolidated into core properties. MLT's properties are considered core for these e-commerce companies.

Not spared by rising rates and FX headwinds

MLT's gearing stood at 37.4% as of the end of 3Q. Management cited that its near-term challenges are higher interest expense and weaker forex compared to Singapore dollar, which could impact MLT's distributable income in the near term. They guided that interest cost could trend higher, by around 10-20bp in 4Q and a further 20-30bp in FY24, compared to its average interest cost of 2.6% at the end of 3Q.

Also take note: MLT has a perpetual bond that is due for reset or redemption soon. MLT may choose to refinance its upcoming perpetual bond into debt at 4.3%, which would result in an increase in gearing by 1.4%pts, or reset the bond to ~5%, with the option of calling every six months. In my view, MLT is likely to reset it at 5.3%.

Some scope for asset recycling, but limited

In terms of inorganic growth, MLT indicated that markets such as Australia and South Korea appear more attractive as transaction cap rates have expanded by 20-50bp. They would look to potentially tap into these opportunities through asset recycling activities and utilizing its debt headroom. They recently announced the divestment of three properties in Singapore and Malaysia for S$37.3m at at 3-4% exit yield. 

Overall, MLT plans to sell non-core assets worth S$300mn-400mn and use the proceeds to acquire higher-yielding assets, targeting S$200mn-400mn in acquisitions. Due to the high cost of equity, MLT does not currently have any plans to raise equity to purchase properties.

MLT still looks positive

MLT has exposure to the growing e-commerce industry. Moreover, around 80% of its portfolio has built-in rental escalations (1-3% per year). MLT will likely be a beneficiary of regional supply chain shifts as companies diversify their exposure to China.

However, due to MLT's DPU yield being over 5%, it is now difficult for the company to complete DPU-accretive acquisitions, given the still tight cap rates for logistics assets, which was previously a key share price driver. 

With the risk of a YoY decline in FY24 DPU, I am positive but I recommend not to overweight on MLT in your own portfolio.

As always, do your proper due diligence andhave adequate risk management!

@Daily_Discussion @TigerStars