Mapletree North Asia Commercial Trust - DBS Research 2018-10-29: Trading At An Unwarranted Discount


Mapletree North Asia Commercial Trust - Trading At An Unwarranted Discount

  • Mapletree North Asia Commercial Trust (MAGIC)’s 2Q19 DPU of 1.926 Scts (+3% y-o-y) slightly above expectations. 
  • Resilient results considering depreciation of RMB due to impact of prior rental reversions and boost from timely acquisition into Japan. 
  • Positive 40% rental reversions at Festival Walk due to renewal of anchor tenancy. 
  • Healthy tenant sales up 7% at Festival Walk points to sustained improvement in rents going forward.

Rally to resume.

  • We maintain our BUY call with a Target Price of S$1.45 for Mapletree North Asia Commercial Trust (MAGIC).
  • MAGIC’s share price has fallen year to date, largely due to uncertainty over a potential equity raising to fund an acquisition following the expansion of its investment mandate to include Japan.
  • With the overhang from an equity raising over and delivery of a growing DPU, we believe the rally in MAGIC’s share price should resume given the improving macro conditions in HK, its valuation discount to its HK peers, and boost to DPU from the Japan expansion.

Where We Differ: Yield to compress further.

  • Consensus has a BUY call on Mapletree North Asia Commercial Trust (MAGIC) but the average Target Price of S$1.34 implies a yield that is significantly higher than its HK peers. While some of MAGIC’s HK-listed peers have a lower gearing, we believe MAGIC should re-rate closer to the mid-5% forward yield that its peers are trading at, from its current 6.7% yield given its strong record of DPU performance and having a portfolio with well-located assets.
  • Moreover, we believe MAGIC’s expansion to Japan, kick starting its inorganic strategy, should accelerate its DPU growth. This also justifies a lower trading yield.

Improving HK retail scene.

  • Historically Mapletree North Asia Commercial Trust’s share price lagged during periods when HK retail sales were sluggish, resulting in concerns over the ability of Festival Walk (c.70% of NPI) to increase rents. However, with the HK retail scene on an upturn, we believe the positive news flow from improving retail sales should be a tailwind to MAGIC’s share price.


  • We maintain our DCF-based Target Price at S$1.45. With c.28% capital upside, we reiterate our BUY recommendation.

Key Risks to Our View:

  • The key risk to our view is a significant downturn in the HK Chinese economies, causing a decline in rents.

WHAT’S NEW - Remarkable performance at Festival Walk

MAGIC delivers despite concerns over depreciation of RMB

  • Mapletree North Asia Commercial Trust (MAGIC) had a robust quarter which should allay concerns over the impact of a depreciating RMB. 2Q19 DPU rose 31% y-o-y to 1926 Scts which was slightly above expectations, representing c.26% of our FY19F DPU estimates.
  • Underpinning 2Q19 results was the earnings contribution from the acquisition of a Japanese office portfolio earlier this year. This resulted in 2Q19 revenue and NPI jumping 187% and 180% respectively. However, MAGIC’s three original properties had a strong quarter. Excluding the impact from the Japan acquisition, 2Q19 revenue and NPI would have both risen 45% y-o-y.
  • 2Q19 NPI for Festival Walk rose 43% y-o-y or 41% y-o-y in HKD terms, due to the positive rental reversion achieved over the past year. Occupancy was maintained at 100%.
  • Meanwhile, NPI for Gateway Plaza reported a 62% y- o-y increase or 78% y-o-y in RMB terms. Festival Walk benefitted from prior increases in signing rents but also an uplift in occupancy (987% versus 958% in 2Q18, albeit slightly down from 996% in 1Q19).
  • MAGIC’s other China property, Sandhill Plaza in Shanghai delivered a more modest 18% increase in NPI. Excluding the impact from the depreciating RMB, NPI in local currency terms increased 33% y-o-y. The improvement was due to the 15% rental reversions achieved in FY17 as the property remains fully occupied.
  • With the improvement in occupancy at Gateway Plaza and 100% occupancy for the Japanese portfolio, overall portfolio occupancy increased to 996% from 982% in 2Q18.

Spectacular rental reversions at Festival Walk

  • Festival Walk (retail) reported a 40% increase in signing rents versus expiring rents in 1H19 (up from 14.0% in 1Q19). The strong rental reversion was largely due to the renewal of an anchor tenant over the quarter. Excluding the renewal by the anchor tenant, we understand rental reversions were still healthy, rising by low double digits.
  • For the remainder of FY19 and FY20, subject to no adverse events, MAGIC guided that it remains confident of achieving high single-digit and low double-digit rental reversions.
  • The office component at Festival Walk also reported healthy numbers, with 15% rental reversions for 1H19.
  • Gateway Plaza delivered 8% positive rental reversions for 1H19, although slightly down from the 11.0% achieved in 1Q19. This is a credible result considering the high base from high single- and double-digit rental reversions achieved over the past 3-4 years.
  • Sandhill Plaza, as expected, continued to deliver positive rental reversions, recording a 15% uplift for 1H19 (18% in 1Q19). This is expected as passing rents remain below market.
  • For the Japan portfolio, for 1H18, MAGIC achieved 6% positive rental reversions which were largely reflective of leases signed in 1Q18. MAGIC also guided that for the Monzen-nakacho Building, it has received offers from eight prospective tenants to replace Japan Information Processing Services when it vacates the building. These prospective tenants are expected to take up space for the entire building which should result in positive rental reversions.
  • Post the quarter, 9.1% of leases by gross rental income (GRI) are due to be renewed for the remainder of FY19 (of which 5.4% has already been renewed or re-let). For FY20, c.24.4% of leases by GRI are set to expire.

Strong tenants sales up 7.0% y-o-y

  • The recovery in tenant sales continued on the back of the upturn in the HK retail market. Tenant sales jumped 7.0% y-o-y in 2Q19 although slower than the 10.9% y-o-y increase in 1Q19.
  • However, 2Q19 foot traffic fell 1.9% y-o-y after the healthy increase over the last three quarters (3.5-7.2% increase y-o-y).

Potential increase in NLA at Festival Walk

  • We understand, Festival Walk is in discussions with the HK authorities about gaining an additional 10,000 sqft in NLA. This follows delays in obtaining approval to gain c.10,000 sqft by converting the loading bay into extra NLA.

Stable gearing

  • Gearing remain stable at c.39%, with the proportion of fixed rate debt falling to c.78% from c.90% in June 2018.
  • Borrowing costs inched up to 2.48% from 2.44% in 1Q18, although down from 2.76% at end-4Q18 owing to the addition of low JPY borrowing costs.
  • Despite the volatility in FX rates, the strength of the HKD versus SGD countered the depreciation of the RMB. Consequently, net asset value per unit rose to S$1.325 from S$1.321.

Maintain BUY, Target Price of S$1.45

  • With Festival Walk maintaining its healthy rental reversions across its portfolio, this should translate into higher earnings ahead.
  • In addition, we believe the resilient 2Q19 results should allay fears over the impact from the depreciation of the RMB, which in our view has been one of the factors causing Mapletree North Asia Commercial Trust’s share price to correct over the past few months.
  • Thus, with 2Q19 results slightly ahead of expectations, we maintain our Target Price of S$1.45 and reiterate our BUY recommendation. At current levels, MAGIC is trading on a 6.7% FY19 yield.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-10-29
SGX Stock Analyst Report BUY MAINTAIN BUY 1.450 SAME 1.450