Mapletree Commercial Trust - DBS Research 2016-01-06: Upside from vivocity

MAPLETREE COMMERCIAL TRUST N2UY.SI

Mapletree Commercial Trust - Upside from vivocity

Mapletree Commercial Trust (MCT) offers investors exposure to resilient retail and office assets amid industry and economic headwinds.
MCT owns VivoCity (c.65% of NPI), Singapore’s largest mall, which has by and large bucked Singapore’s overall retail sales slowdown. It is one of the best performing malls in Singapore by virtue of its popularity with families and close proximity to Sentosa.
In addition, the low level of office lease expiries until FY17/18 minimises potential volatility in rents and occupancy when a large supply of office space enters the CBD in the next 1-2 years.

Given that rising labour costs have affected retailers’ profitability, the Manager is focussed on retaining tenants rather than driving rents.
Over the next 18 months, close to 30% of MCT’s leases will be due for renewal, a large proportion of which comes from VivoCity.
Rather than being a risk, we believe that the large number of expiries could result in positive earnings surprise, as it will give the Manager flexibility in reconfiguring the mall and refreshing the tenant mix, in order to maximise trading performance.

Retail rental reversions of 13.2% demonstrate the strong retailer demand at VivoCity. 2Q16 (FYE Mar) shopper traffic and tenant sales grew 3.1% and 5.5% y-o-y respectively, on the back of several long weekends during the quarter (National Jubilee, Election Day), as well as a full quarter of trading from new tenants post completion of AEI works at basement 1.
Occupancy costs are in the 18% range, which the Manager considers comfortable.

We maintain our DCF-backed target price to S$1.40 as we roll forward our valuations.
At current price, the stock offers 6.2-6.3% dividend yield for FY15/16, which is attractive in our view, and total potential returns of 12%. As such, we upgrade our recommendation to BUY.

Vacancy risk While large lease expiries give the Manager the flexibility in refreshing the tenant mix and positioning of the mall, changes have to be timed carefully.
Should any of the Manager’s plans involve its anchor tenants, there could be some disruptions to the trading of the mall as well as higher frictional vacancies in the near term.

Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-01-06

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