Mapletree Commercial Trust - CGS-CIMB Research 2019-03-19: Growth With Downside Protection


Mapletree Commercial Trust - Growth With Downside Protection

  • MBC II is ripe for acquisition. On a base-case scenario, the acquisition would raise FY20-21F DPU by about 4.8-4.9% and total return to a strong 17%.
  • We expect stronger reversion for VivoCity and MBC I. Lower supply and AEI benefits VivoCity; MBC I to see stronger demand from decentralisation.
  • Mapletree Commercial Trust is now our preferred retail REIT, given its growth potential and consistent DPU growth. Maintain ADD with a higher target price of S$1.94.

Mapletree Commercial Trust (MCT) has performed well recently

  • Mapletree Commercial Trust (SGX:N2IU) has performed well recently, gaining 14% since Nov 2018. Despite the strong share price appreciation, we continue to like the stock and believe there is still room for more upside, as we see more growth potential from the REIT.
  • The benign interest rate environment and macro uncertainties will also increase investor demand for REITs, especially Mapletree Commercial Trust which has been delivering stable DPU income, thanks to its two largest assets – VivoCity and MBC I.
  • In this report, we list out the growth drivers of Mapletree Commercial Trust and explain how its two largest jewels would provide stability to the REIT.

The key catalyst and largest DPU growth driver of the stock is the acquisition of MBC II

  • The key catalyst and largest DPU growth driver of the stock is the acquisition of MBC II as it would potentially boost Mapletree Commercial Trust’s FY20-21 DPU growth by 4.8% to 4.9% based on our base case scenario (5.5% acquisition yield and 60% debt funded) and assuming a full-year’s contribution in FY20.
  • MBC II, which we consider as Mapletree Commercial Trust’s 3rd jewel (if Mapletree Commercial Trust acquires it), shares similarities with MBC I in that it is located right behind MBC I and built according to Grade-A office specifications with extensive amenities provided. Its tenant profile is also similar to MBC I.
  • Given the similarities, we expect the acquisition to further enhance Mapletree Commercial Trust’s income stability. We think that the acquisition could be anytime now as the asset has stabilised in terms of occupancy and Mapletree Commercial Trust’s gearing has also been reduced to a healthier level. It is also timely to acquire it soon in view of the increasing office rental rates which would eventually spill over to business parks.

MCT’s assets are well-positioned to ride the favourable industry outlook.

  • Retail supply is expected to taper down from 2020. While there will be a strong supply inflow in 2019, most of the retail supply has been taken up. Hence, we are less concerned that the high supply in 2019 would weigh on rental rates. Factoring in the recovery of the sector, in which we think VivoCity (47% of 9MFY19 NPI) will benefit the most given its status as a destination mall in a strategic location, we raise our FY20-21 rental reversion assumptions for VivoCity from 1% to 3%.
  • In addition to the sector recovery, the mall is also expected to see stronger rental income in FY20-21 from the completion of B1 extension in Jun 2018. VivoCity has seen strong rental reversions in the past but it has yet to realise its full potential as based on our estimates, its rental rate is still relatively low as compared to the average rental rates of the malls within the city fringes and selected better-performing malls in Singapore. While the relatively slower average rental rate could be due to the higher number of anchor tenants in the mall, it nonetheless indicates that there is room for improvement.
  • Like VivoCity, we expect MBC I (30% of Mapletree Commercial Trust’s 9MFY18 NPI) to benefit the most from the increasing office rental rate given that it is a rare best-in-class business park located nearest to CBD. Furthermore, MBC I offers a large rental discount as compared to the office rents in the CBD area.
  • As the gap between office rental rate in the CBD and decentralised area widens, more tenants would be looking for cheaper alternatives in decentralised areas. This should also benefit Mapletree Commercial Trust’s other office assets in the city fringe, aside from MBC I. Moreover, there is a limited supply of business parks island-wide, especially in the city fringe, in the next three years. We believe that MBC I, which has been receiving strong demand as testified by its outperformance versus its peers in the vicinity, should be the front-runner, benefiting from decentralisation and helping it sustain premium rental rates.

MCT’s potential growth comes with downside protection

  • Mapletree Commercial Trust’s potential growth comes with downside protection as we expect VivoCity, MBC I and MLHF which collectively contribute 81.5% of Mapletree Commercial Trust’s 9MFY19 NPI to continue to deliver stable income.
  • We expect VivoCity to draw consistent shopper traffic from the locals and tourists given that it is one of the few destination malls in Singapore and it is a gateway to Sentosa Island and connected to HarbourFront Cruise Terminal via HarbourFront Centre, one of its ROFR assets. Being the largest mall in Singapore, VivoCity will be in a more competitive position to defend its market share amid the challenging retail environment.
  • MBC I would also see constant demand from quality tenants due to its Grade-A quality, close proximity to CBD and large rental discount as compared to the offices in CBD. Due to its quality, MBC I has a strong tenant profile of which about 58% are made up of relatively resilient industries, such as banking & financial services, government agencies, consumer goods and pharmaceuticals.
  • Another pillar for its stable income is its MHLF building which is anchored by Merrill Lynch Global Services Pte. Ltd. (ML). The building is 100% occupied by ML and two other MNC tenants. There is no lease expiry until FY22.
  • See attached 36-page PDF report on complete analysis on Mapletree Commercial Trust's #1 gem - VivoCity, #2 gem - MBC I and other office assets - Mapletree Anson, PSA Building and MLHF. 

In short, we see MCT as a stock which offers upside potential with limited downside risk.

  • We maintain our ADD call on Mapletree Commercial Trust with a higher DDM-based target price of S$1.94 as we raise our rental reversion assumptions to reflect the increasing office rental rate and recovery of the retail sector. It is also our pick for the retail sector.
  • At a Target Price of S$1.94, Mapletree Commercial Trust’s yield would be 4.8% which is on par with the large-cap REITs of the office and retail subsectors. We think this is justifiable given its growth potential and consistent DPU growth which makes it a safety net during weaker economic conditions and in a benign interest rate environment.
  • The valuation of Mapletree Commercial Trust’s assets also appears to be conservative relative to the recent market transactions. For instance, VivoCity’s cap rate of 4.75% is higher than the exit yield of Jurong Point at 4.2% in 2017, Westgate’s entry yield of 4.3% in 2018 and Rivervale Mall’s exit yield of slightly more than 4%. Mapletree Anson’s cap rate of 3.7% is also more conservative than the transaction yield of Twenty Anson at 2.7%.
  • The acquisition of MBC I pushed Mapletree Commercial Trust’s DPU yield valuation to above +1 s.d. While the current valuation is above +1 s.d., we think it is more likely to be driven by the benign interest rate environment and believe that the market has yet to factor in the potential acquisition of MBC II.
  • A key risk of the stock would be the weaker-than-expected rental reversion in particularly when 40% of MBC I’s leases are up for renewal in FY21. MBC I contributed 30% of its NPI in 9MFY19, so a negative rental reversion on the expiring leases in FY21 would have an impact on our DPU forecast. Based on our analysis, a 1% decline in MBC I’s rental reversion in FY21 will impact our DPU forecast by 0.2%.

Acquisition on the cards?

The largest asset is ripe for acquisition

  • Mapletree Commercial Trust has the right of first refusal (ROFR) over a few income-producing properties located in Singapore that are used primarily for office and/or retail purposes. The largest property in the pipeline is Mapletree Business City Phase 2 (MBC II) which has an NLA of ~1.2m sq ft. Given that MBC II has reached stabilised occupancy and that Mapletree Commercial Trust’s gearing level has declined to a more manageable level of 34.8% as at Dec 2018, we think MBC II could be ripe for acquisition. Considering this, we worked out how much MBC II would contribute to Mapletree Commercial Trust should it decide to acquire.
  • Based on our scenario analysis of Mapletree Commercial Trust acquiring MBC II at MBC I’s valuation and assuming
    1. the acquisition will be funded equally with debt and equity, 60% debt at 3% interest and
    2. acquisition yields of 5.0% to 6.0%,
    we estimate the acquisition will be 1.5% to 7.1% accretive to Mapletree Commercial Trust’s FY20-21 DPU and raise our target price to S$1.98 – S$2.09.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2019-03-19
SGX Stock Analyst Report ADD MAINTAIN ADD 1.94 UP 1.900