Mapletree Commercial Trust - DBS Research 2017-07-28: VivoCity Still One-of-a-kind

Mapletree Commercial Trust - DBS Vickers 2017-07-28: VivoCity Still One-of-a-kind MAPLETREE COMMERCIAL TRUST N2IU.SI

Mapletree Commercial Trust - VivoCity Still One-of-a-kind

  • MCT's DPU up 10% due to Mapletree Business City I acquisition (in line).
  • Low positive rental reversion needs a closer look.
  • VivoCity revamping offerings to enhance distinctive position as a destination mall for families.
  • Downgrade to HOLD as TP S$1.62 is reached.



HOLD due to valuation; TP S$1.62 is reached. 

  • We continue to like Mapletree Commercial Trust (MCT) for its quality assets that bring strong earnings visibility and have the ability to ride through market cycles, however, we believe that positives are priced in at 1.2x P/NAV. 
  • Both assets are gems, given the lack of supply in these market segments, and we believe they will remain resilient during periods of uncertainty. 
  • We downgrade our call to HOLD on the basis of valuation as the stock has rallied around 17% since its recent low and reached our TP.


WHAT’S NEW


DPU in line, VivoCity enhances offerings, downgrade to HOLD as TP has been reached 

  • DPU up 9.9% thanks to the acquisition of MBC I. 1Q18 gross revenue was S$107.8m, 46.9% higher y-o-y, and net property income (NPI) was S$84.2, 49.6% higher y-o-y. The increase was mainly attributable to the acquisition of MBC I in August 2016. 
  • 1Q18 DPU was 2.23 Scts, up 9.9% y-o-y, and represents 25.4%, slightly surpassing our FY18 full-year forecast. 
  • Excluding MBC I, NPI of the old portfolio would have increased by 10.5%, still a handsome improvement, mainly due to better performance from VivoCity fruiting its recent AEI and step-up rents structure.

Reversion rates need a closer look. 

  • The portfolio renewed 65 leases at 0.5% higher rates on average. Retail reversion rate was 1.7%, office 0.2% and business parks -5.9%. Despite the negative reversion rate at its business park (ie MBC I), it is important to note that only a couple of leases were renewed under this segment over the quarter, hence the reversion rate may not be representative of the overall prospect of lease renewals and investors should not be alarmed at this stage.
  • We continue to believe that MBC I is a rare asset proposition in Singapore and will remain a very resilient asset in the portfolio. 
  • As for VivoCity, the slowing down in rental growth is within our expectations as the mall has entered its maturity phase. Having said this, the Management has been rigorously enhancing the mall’s layout and offerings to sculpt its distinctive positioning as a destination mall for families.

VivoCity: still one-of-a-kind. 

  • Minor AEI (capital expenditure of S$3m) is on track to complete by 2QFY18 – the enhanced space already has fully committed occupancy with an ROI of c.25%, estimated by the Management, on a stabilised basis.
  • Revamped offerings brought new buzz into mall as we saw 7.2% and 3.8% y-o-y growth in shopper traffic and tenant sales, respectively. 
  • The Management continues to position VivoCity as the preferred destination mall for families, with two new initiatives: 
    1. Adding a public library on level 3 to strengthen the mall’s offerings. Fitting out of the area is targeted to commence in 3QFY18 and complete by 3Q19; 
    2. Launched VivoCity Kids Club, with more than 5,500 registered members over the launch weekend (17-18 June 2017). 
  • We believe both initiatives demonstrate the clear positioning of VivoCity and are powerful traffic pullers to entice the entire family’s patronage and consumption at the mall, which could in turn bring potential rental upside.

Stable occupancy, minimal renewals in FY18. 

  • Marginal improvement was seen in its occupancy rate as it increased from 97.9% to 98.1% over the quarter. Committed occupancy is close to 99%. 
  • WALE is 2.7 years, with 3.4 years for office/business park and 2 years for retail. Minimal leases will be up for renewal for the remaining FY18, with 5% of retail gross rental revenue and 3.9% of office/business park.

Well-distributed debt-maturity profile: No refinancing requirement in FY18. 

  • No more than 20% of debt is due for refinancing in any financial year. Gearing remains healthy at 36.4% and the average term to maturity of debt remains around four years. Weighted average cost of financing is stable at 2.67% p.a.


OUR VIEW 

  • While we continue to like MCT as it owns some of the best malls and business parks in Singapore, we downgrade our recommendation to HOLD based on valuation, as the MCT's share price has rallied around 17% this year and from its most recent low. 
  • The current price has reached our TP of S$1.62, offering a stable yield around 5.5%. While the slowing down in rental reversions may send ripples in the market, we believe the lack of competitive supply in MCT’s market segments will help the portfolio remain resilient during periods of uncertainty.


Where We Differ: Our FY18F DPUs is marginally lower than consensus. 

  • Our FY18F DPU is 1.5% lower than consensus mean whereas FY19F DPU is in line. 
  • While VivoCity’s net property income (NPI) margins could surprise on the upside, given its ability to use space more efficiently, this potential is capped for FY18F as the leases due for the remaining FY18 only represents 5.0% of the mall’s gross rental income. Similarly, leases due from office/business park for the rest of FY18 only accounts for 3.9% of the segmental revenue. 
  • We project growth momentum to moderate further in 2019F to 1%; as effects of its acquisitions taper off and expect VivoCity’s rental reversion to turn flattish at low single-digit growth given the maturity of the asset and the overall tough retail operating environment.


Potential Catalyst: Upside potentials from VivoCity and MBC I.

  • We have assumed conservative rental reversion at VivoCity in the low single-digits going forward. Any improvement in reversions may lead to share price upside. Better-than-expected performance from MBC I is another catalyst.


Valuation

  • TP unchanged at S$1.62. Downgrade to HOLD as our TP has been achieved. 
  • Dividend yield is around 5.5%.


Key Risks to Our View

  • Weaker operational performance from VivoCity. Signs of a slowdown are being observed at VivoCity as anticipated as the mall is gradually phasing into a matured stage. 
  • Management has been rigorously revamping the offerings of the mall which could mitigate this risk.




Singapore Research Team DBS Vickers | Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-07-28
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 1.620 Same 1.620



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