Mapletree Greater China Commercial Trust (MAGIC SP) - DBS Research 2017-08-02: Time To Play Catch-up

MAPLETREE GREATER CHINACOMM TR RW0U.SI

Mapletree Greater China Commercial Trust (MAGIC SP) - Time To Play Catch-up

Mapletree Greater China Commercial Trust (MAGIC)'s strong 1Q18 results which overpower impact of higher tax rates.
Rental reversions remain stable; turnaround in tenant sales at Festival Walk a positive.
Manager to look for acquisitions to further drive growth.

As expected, MAGIC reported 1Q18 DPU of 1.85 Scts which was up 0.1% y-o-y. This was in line with our expectations given 1Q18 incorporated the impact from higher property taxes at Festival Walk which was absent in 1Q18. Stripping out the tax impact, we estimate 1Q18 DPU would have been up around 2- 3% y-o-y.
Despite the drag from the higher property tax, 1Q18 gross revenue and NPI grew 4.6% and 3.7% respectively. This was attributed to higher average rents across MAGIC’s three properties.

Festival Walk reported an improvement in margins arising from lower property expenses. This caused NPI to jump 6.1% to S$49.9m, outpacing the 2.9% increase in top line. NPI also benefitted from a stronger HKD.
However, NPI for Gateway Plaza was down 1.7% yo-y mainly due to the additional property tax and weaker RMB which offset the 11.4% rise in revenues which were primarily boosted by occupancies (98.8% versus 95% in 1Q18), higher average rents and lower VAT rate compared to 1Q18.
Sandhill Plaza was stable with NPI flat at S$5.5m. The performance would have been better if not for a decline in occupancy (97.5% versus 100% in 1Q18) and a weaker RMB versus SGD. Underlying NPI in RMB was estimated to have risen 2.5% y-o-y.
Overall portfolio occupancy remains high at 98.8% boosted by 100% occupancy at Festival Walk and was an improvement from 97.8% in 1Q18.

1Q18 tenants sales rose 2.1% y-o-y, the first increase since 2Q16. Foot traffic also registered a 4.6% growth in 1Q18. The improvement in retail sales and footfall was partially due the opening of two mini-anchors. Muji opened over the quarter, while the Festival Grand cinema had been closed between January to July 2016.
Meanwhile, rental reversions at Festival Walk moderated as expected, up 9% from 12% achieved over FY17. Rental reversions at Gateway Plaza and Sandhill Plaza were also healthy at 10% and 13% respectively. For Gateway Plaza it matched the 10% increase for the whole of FY17 while at Sandhill Plaza it was down slightly from the 16% level in FY17.
Over the quarter, 68% of leases at the portfolio level that were due to expire were renewed or re-let. Thus, as at 30 June 2017, another 11.6% of leases are up for renewal this financial year.

Gearing and the effective costs of debt remain stable at 39.4% and 2.74% respectively.
The portfolio of fixed rate debt increased marginally over the quarter to 76% from 71%.
To manage its FX exposure, around 58% of FY18 has already been hedged.
NAV per unit declined to S$1.244 from S$1.301 as at end-March 2017, as a consequence of a weaker HKD and RMB and impact from the payment of last year’s DPU.

We maintain our BUY call with TP of S$1.25.
We believe the market will likely react positively to the news that tenant sales have finally turned the corner, reducing the risk of negative rental reversions in the near future which some investors have been fearful of.
In addition, we continue to like MAGIC for its attractive valuations, offering a prospective FY18 yield of 6.7% which is the highest yield among the large-cap REITs.
Furthermore, with most large-cap REITs trading close to or at a premium to book value, MAGIC also offers a compelling switch, trading at a 11% discount to book value.

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | Singapore Research DBS Vickers | http://www.dbsvickers.com/ 2017-08-02

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.250 Same 1.250