Mapletree North Asia Commercial Trust - DBS Research 2019-07-18: On A Winning Streak

MAPLETREE NORTH ASIA COMM TR (SGX:RW0U)

Mapletree North Asia Commercial Trust - On A Winning Streak

Lower interest rates for longer leads us to lift our DCF Target Price to S$1.65 from S$1.60.
Strong rental reversions over the past year to underpin firmer DPU ahead.
Opportunity for Mapletree North Asia Commercial Trust’s yield to compress to c.5%, in line with listed HK peers.

We maintain our BUY call with a revised street-high Target Price of S$1.65 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. The rally can continue due to the attractive 5.5% yield on offer 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 record year.

Consensus Target Price of S$1.43 implies a HOLD call and yield that is significantly higher than its HK peers and is in line with 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 to c.5% closer to the yield of its HK retail peers from its current 5.5% yield, given its strong 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 valuation, similar to its other sister Mapletree REITs. This can be seen in the 10% increase in NAV at end FY19, reaching close to our previous Target Price of S$1.45, which we had held in the past year.

While the HK retail market has moderated recently, we believe benefits from the upturn in 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.

Our DBS economists have projected two interest cuts by the US Federal Reserve in 2H19 which is expected to work as an insurance policy against the impact of the current trade tensions. The implications from the expected rate cuts is that interest rates are expected to remain lower for longer. To better reflect this outlook, we adjusted our macro assumptions to derive our DCF-based Target Price. Our risk-free rate is lowered to 2.5% from 3.0% previously, with cost of debt reduced to 2.75% from 3.0%. This is partially offset by a weaker SGD-RMB exchange rate.
Overall, we have raised our Target Price to S$1.65 from S$1.60.
We have also tweaked our FY21- 22F DPU estimates 1% higher as we now expect Mapletree North Asia Commercial Trust’s borrowing rates to be flattish rather than up. We expect Mapletree North Asia Commercial Trust to use lower benchmark rates to term out its debt maturity, mitigating lower borrowing costs at the short end of the interest rate curve.

We reiterate our BUY call with a street high Target Price of S$1.65. While they may be some near-term headwinds from the slowdown in HK, Mapletree North Asia Commercial Trust is well positioned with its key asset, Festival Walk, positioned as a suburban mall. In addition, Festival Walk should benefit from the 28% rental reversions achieved in FY19.
Furthermore, we believe Mapletree North Asia Commercial Trust should trade closer to its listed HK peers. The current yield differential to for example Fortune REIT (SGX:F25U) is unjustified in our view, given the quality of Mapletree North Asia Commercial Trust’s portfolio (exposure to dominant suburban mall, under-rented properties in Shanghai and stability from its Japanese portfolio), strong track record of DPU performance and strong parentage in Mapletree Group.

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

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-07-18

SGX Stock Analyst Report BUY MAINTAIN BUY 1.65 UP 1.600