Mapletree North Asia Commercial Trust - DBS Research 2019-04-30: Records Are Made To Be Broken


Mapletree North Asia Commercial Trust - Records Are Made To Be Broken

  • As expected Mapletree North Asia Commercial Trust's 4Q19 DPU of 1.956 Scts (+3% y-o-y) resulted in record FY19 DPU of 7.69 Scts (+3% y-o-y).
  • Festival Walk powers along with 4Q19 NPI up 5% y-o-y and 28% positive rental reversions supportive of income ahead.
  • 10% uplift in NAV per unit demonstrates why Mapletree North Asia Commercial Trust deserves to trade at a premium to book.

Rally to continue.

  • We maintain our BUY call with a revised street-high Target Price of S$1.60 for MAPLETREE NORTH ASIA COMMERCIAL TRUST (SGX:RW0U).
  • Mapletree North Asia Commercial Trust is one of our key picks and has been one of the best-performing S-REITs year to date. However, in our view the rally can continue due to the attractive 5.9% yield with steady 2% DPU growth per annum underpinned by consistent positive rental reversions and quality properties.
  • Having hit a record share price and annual DPU in FY19, we believe FY20 will be another year where records are broken again.

Where We Differ: Yield to compress further.

  • Consensus Target Price of S$1.36 implies a HOLD call and a yield that is significantly higher than its HK peers and below Mapletree North Asia Commercial Trust’s NAV of S$1.44. While some of Mapletree North Asia Commercial Trust’s HK-listed peers have a lower gearing, we believe Mapletree North Asia Commercial Trust should re-rate closer to the c.5% blended forward yield that its HK retail peers are trading at, from its current 5.9% yield given its strong record of DPU performance and having a portfolio of well-located assets.
  • Furthermore, we believe Mapletree North Asia Commercial Trust’s consistent delivery of NAV upside warrants a premium to book similar to its other Mapletree sister REITs. This can be seen in the recent 10% increase in NAV, close to our previous Target Price of S$1.45, which we have held for the past year.

Tailwinds from recent rental reversions.

  • While the HK retail market has moderated recently, we believe the tailwinds from the upturn over the past 18 months via increases in rents/positive rental reversions should continue to flow through and act as a tailwind to Mapletree North Asia Commercial Trust’s share price.


  • After lowering our beta assumption to 0.80 from 0.86 and cost of debt from 3.5% to 3.0%, we raised our DCF-based Target Price to S$1.60 from S$1.45.

Key Risks to Our View:

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

WHAT’S NEW - Jump in NAV per unit

Maintains consistent quarterly DPU growth

  • MAPLETREE NORTH ASIA COMM TR (SGX:RW0U) reported a 4Q19 DPU of 1.956 Scts, up 2.7% y-o-y, taking FY19 DPU to 7.690 Scts (2.8% y-o-y) which is a record annual dividend and in line with our expectations.
  • The consistent delivery of DPU remains underpinned by steady and resilient performance of Mapletree North Asia Commercial Trust’s largest asset Festival Walk in HK and contribution from the Japan office portfolio in 1Q19.
  • These two drivers also led 4Q19 revenue and NPI jumping 16.2% and 15.3% y-o-y to S$104.0m and S$84.0m respectively. Stripping out the boost from the Japan acquisition, both revenue and NPI of Mapletree North Asia Commercial Trust’s original portfolio would have risen by 2.2% y-o-y.

Festival Walk kicks another goal

  • Festival Walk had a strong end to the year with 4Q19 revenue and NPI increasing by 4.2% and 5.1% y-o-y to S$63.9m and S$51.8m respectively. Stripping out the impact of a 2% stronger HKD versus SGD, 4Q19 revenue and NPI would still have risen 1.7% and 2.5% y-o-y in HKD terms respectively.
  • The better results in HKD terms were largely led by the impact of positive rental reversions over the past year with the property being fully occupied.
  • Over the quarter, tenant sales and footfall fell 5.8% and 4.7% y-o-y respectively on the back of a softening retail sector in HK and high-base effect. Tenant sales and foot traffic were impacted by refurbishment works at the Taste supermarket which were only completed in February. In addition, we also understand tenant sales have improved in March/April.
  • Nevertheless, with tenant sales rising 2.2% y-o-y and 28% higher rents for new leases or renewal for the whole of FY19, we expect Festival Walk to continue to deliver a steady performance ahead.

Maturing Gateway Plaza

  • After the stellar growth of Gateway Plaza in Beijing since Mapletree North Asia Commercial Trust’s listing, earnings contribution from the property moderated with a further drag from a weaker CNY as expected. 4Q19 revenue and NPI for Gateway Plaza fell 2.3% and 4.0% y-o-y to S$21.5m and S$17.0m respectively.
  • On a constant currency basis, 4Q19 revenue would have risen by 1% y-o-y with NPI dropping 0.8% y-o-y. While occupancy was higher at 99.0% versus 96.5% in 4Q19, there may have been some impact from recent renewals. This can be seen with the positive rental reversion dropping from 8% for 9M19 to 2% for the whole of FY19.
  • With new office supply hitting the Beijing market and more cautious demand profile by prospective tenants on the back of recent trade tensions, we expect a slight dip in occupancy and rental reversions to be flattish or marginally down over the coming year.

FX impact on Sandhill Plaza but steady contribution from Japan

  • Earnings from Sandhill Plaza were also impacted by a weaker CNY, with 4Q19 revenue and NPI for the property falling 1.6% and 3.4% y-o-y to S$6.1m and S$5.6m respectively. Excluding the impact of the depreciation of the CNY, 4Q19 revenue would have been up 1.6% with a dip in margins contributing to a 0.2% y-o-y fall in NPI.
  • Overall, Sandhill Plaza’s occupancy remains high a 99.3% albeit slightly lower than 100.0% achieved in 4Q18 and should benefit from 15% positive rental reversions achieved for FY19 which is slightly higher than 14% increase reported for 9M19.
  • Meanwhile, earnings from Japan were stable q-o-q as expected.

Fall in gearing to c.37% post revaluation gains

  • Following revaluation gains and uplift from a stronger CNY and JPY, Mapletree North Asia Commercial Trust’s gearing fell to 36.6% from 39.0% at end-December 2018. Likewise NAV per unit now stands at S$1.445, up from S$1.316 at end 3Q19. Excluding the Japanese properties, Mapletree North Asia Commercial Trust reported an 8.5% increase in its portfolio value largely due to a 10- 50bps compression in cap rates.
  • Festival Walk is now valued using a 4.15% (gross) cap rate down from 4.25% previously, while Gateway Plaza’s cap rate fell to 5.75% (gross) from 6.25% in the prior year. For Sandhill Plaza, its cap rate stands at 5.0% (gross) versus 5.5% previously.
  • The Japan portfolio saw a 1.7% increase compared to its SGD acquisition price largely on the back of higher income with cap rates stable at 4.10-4.80%.
  • Assuming a long-term target gearing of c.42% in line with the previous management guidance, Mapletree North Asia Commercial Trust has c. S$720m of debt headroom to pursue acquisitions. GIC is exploring office/business park assets in Tier 1 and Tier 1.5 cities in China, as well as commercial assets in Japan and Korea.
  • Mapletree North Asia Commercial Trust’s effective interest rate was stable at c.2.5% with c.86% of borrowings on fixed rate debt.

Incorporating lower borrowing costs

  • Our DBS economists are now projecting the US Federal Reserve (Fed) to no longer increase interest rates compared to previous expectations for four rate hikes. Thus, we have lowered our borrowing costs by 30- 40bps which results in a 2% increase in our FY20-22F DPU.
  • In addition, we have lowered our cost of debt to 3.0% from 3.5% previously and combined with a lower beta of 0.80 from 0.86 previously, we have raised our DCF-based Target Price to S$1.60 from S$1.45.
  • Our Target Price implies a P/Bk of c.1.1x which we believe is fair considering Mapletree North Asia Commercial Trust’s track record of delivering NAV growth but more importantly steady DPU growth. This premium to book is consistent with what the market accords Mapletree North Asia Commercial Trust’s other sister Mapletree Group of REITs which has a similar profile of steady DPU growth and NAV upside.
  • In addition, the NPI/EV ratio implied by our Target Price stands at the mid-4% level which we believe is conservative given sub 4% assets yields for HK commercial assets and the difficulty in assembling Mapletree North Asia Commercial Trust’s portfolio in today’s environment.

Maintain BUY, Target Price of S$1.60

  • With 4Q19 results in line with expectations, we reiterate our BUY call with a street-high Target Price of S$1.60.
  • We continue to like Mapletree North Asia Commercial Trust for its resilient and steady DPU profile combined with quality Grade A assets in Hong Kong, China and Japan.
  • Furthermore, there will be upside risks should Mapletree North Asia Commercial Trust utilise its c.S$750m debt headroom.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-04-30
SGX Stock Analyst Report BUY MAINTAIN BUY 1.60 UP 1.450