Mapletree Commercial Trust - CGS-CIMB Research 2018-07-26: 1QFY19 Steady As It Goes

Mapletree Commercial Trust - CGS-CIMB Research 2018-07-26: 1QFY19 Steady As It Goes MAPLETREE COMMERCIAL TRUST SGX:N2IU

Mapletree Commercial Trust (MCT) - 1QFY19 Steady As It Goes

  • MCT's 1QFY3/19 DPU of 2.23 Scts is in line at 24.7% of our FY19 projections.
  • Strong performance at VivoCity, with positive rental reversion.
  • Office rents should stabilise in tandem with the positive market outlook.
  • Maintain ADD with an unchanged Target Price of S$1.75.

1QFY3/19 results highlights

  • Mapletree Commercial Trust (MCT) reported 1QFY3/19 gross revenue of S$108.5m, up 0.7% y-o-y on the back of higher contributions from Merrill Lynch HarbourFront (MLHF), PSA Building and Mapletree Business City Phase 1 (MBC I), albeit partially offset by lower contributions from Mapletree Anson and VivoCity.
  • Net property income grew a faster 2.1% y-o-y due to lower expenses for utilities, property maintenance, and marketing and promotion.
  • Distribution income rose a slight 0.4% y-o-y to S$64.6m but DPU of 2.23 Scts was flat y-o-y due to the larger base number of units.

VivoCity’s fundamentals remained strong

  • VivoCity's revenue (46.7% of 1QFY19 revenue) dipped 0.2% y-o-y due to lower advertising and promotion revenue, though partially offset by higher rental income despite the downtime from its ongoing asset enhancement initiative (AEI). Occupancy rose from 93.1% in 4QFY18 to 94.2% in 1QFY19 while committed occupancy stayed high at 99.9%. Tenant sales declined 4.1% y-o-y due to the ongoing AEI; shopper traffic grew 0.4% y-o-y.
  • Given the ongoing effort to refresh the mall, we anticipate continued positive renewals for the leases expiring in FY19/FY20F, which account for 7.5%/14.3% of its rental income. Rental reversion rose 2.1% in 1QFY19.

Office portfolio should deliver stable contributions

  • Merrill Lynch HarbourFront (MLHF)'s revenue rose 12.2% y-o-y to S$4.9m amid full occupancy while the rental from PSA Building (+1.9% to S$12.7m) and Mapletree Business City I (+0.6% to S$31.6m) were driven by the effects of step-up rents in existing leases. Mapletree Anson’s rental declined 1.1% y-o-y due to lower occupancy, which offset the effects of step-up rents in its existing leases and compensation received.
  • Office segment’s negative rental reversion of 5.3% in FY18 was due to the reversion of expired rent for a small portion of its overall office NLA to market rate.  Including a rent review by a key tenant at Mapletree Business City I for ~195k sq ft, Mapletree Commercial Trust's overall office rent reversion only dipped 0.1%. A further 11.5% of its office rental leases are due to be re-contracted in FY19-20F.

Balance sheet healthy

  • Gearing increased 0.2% pts q-o-q to 34.7% at end-1QFY19. Interest cost inched up to 2.91% from 2.75% in 4QFY18. Some 75.3% of Mapletree Commercial Trust's debts are on fixed rates. The trust has a remainder S$144m to be refinanced in FY19F.
  • We anticipate that overall interest cost could inch up marginally in FY19F, given the rising interest rate environment.

Maintain ADD

  • We keep our DPU forecasts and DDM-based Target Price of S$1.75.
  • We expect earnings to remain stable, underpinned by improved portfolio occupancy, as well as good VivoCity performance and earnings contribution from its newly-reopened B1 and upcoming opening of level 3 (currently undergoing fitting-out). The entire AEI in the mall would deliver ROI of ~10% once the performance of the refurbished space stabilises.
  • Office portfolio should improve in the medium term, led by better office rental rates. 
  • Potential re-rating catalysts are further asset acquisitions and downside risks are worse-than-expected retail and office rents.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-26
SGX Stock Analyst Report ADD Maintain ADD 1.750 Same 1.750