Mapletree Commercial Trust - CGS-CIMB Research 2019-09-27: Owning The Entire MBC


Mapletree Commercial Trust - Owning The Entire MBC

  • Mapletree Commercial Trust’s acquisition of Mapletree Business City Phase II (MBC II) is expected to be 3-4% DPU accretive.
  • We expect MBC II, a rare best-in-class business park, to further underpin Mapletree Commercial Trust’s income growth and stability.
  • We believe near-term catalysts have been priced in. Downgrade to HOLD.

Acquiring the long-awaited MBC II

  • MAPLETREE COMMERCIAL TRUST (SGX:N2IU) has announced that it is acquiring Mapletree Business City Phase II (MBC II) at a total acquisition price of S$1,575.8m (5% acquisition yield), to be funded by a mix of debt and up to 500m new shares via private placement and issuance of preference shares. Based on proforma financials, the deal is expected to be 4% DPU and 2.2% NAV accretive.
  • Post-acquisition, Mapletree Commercial Trust’s portfolio valuation will be enlarged from S$7.4bn to S$8.9bn and raise rental income contribution from the technology segment, a growth sector, from 5.5% to 18% of Mapletree Commercial Trust’s total gross rental income. Gearing is estimated to be ~34%.

A beneficiary of decentralisation and flight to quality

  • We view the acquisition positively. We expect MBC II to further enhance the income stability of Mapletree Commercial Trust in view of the quality of the building and strategic location. It is one of the rare business parks with Grade-A building specifications which offers a cheaper alternative to CBD offices. 53% of the MBC II’s business park tenants have relocated from the CBD, while 29% of the business park tenants have relocated to MBC II in pursuit of higher quality space.
  • Post-acquisition, VivoCity, MBC I and MBC II (Mapletree Commercial Trust’s jewel assets) would constitute 79% of Mapletree Commercial Trust’s enlarged portfolio and 81% of NPI.

Expect MCT to deliver steady growth going forward

  • We expect rental rates of business parks on the city fringe to continue to trend upwards gradually given the low supply of business parks on the city fringe. MBC II boasts a high 99.4% committed occupancy, with 97% of leases embedded with ~2.3% average annual rental step-ups.
  • We expect MBC as a whole to continue to command rental premium given its quality and location. The acquisition will complete Mapletree Commercial Trust’s control over the entire Alexandra Precinct which should help it to achieve greater economies of scale and efficiency.
  • Mapletree Commercial Trust’s long-term growth will be further enhanced by the government’s Greater Southern Waterfront Development Plans which will see the addition of 9,000 housing units and commercial space as well as theme park rejuvenation at Pulau Brani.

Short-term catalysts priced in, downgrade to Hold

  • We raise our FY20-22 DPU forecasts by 1-4%, factoring in the contribution from MBC II, assuming 45%/55% debt-to-equity funding ratio. This raises our DDM-based Target Price to S$2.38. While we like the deal, we downgrade Mapletree Commercial Trust from Add to HOLD as we think the strong Mapletree Commercial Trust share price performance recently has priced in near-term catalysts.
  • The stock is currently trading at 4% yield versus its REIT sector average of 6%. See Mapletree Commercial Trust's dividend history.
  • Accumulate on share price weakness.
  • Upside/downside risks include better/worse rental reversion.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2019-09-27
SGX Stock Analyst Report HOLD DOWNGRADE ADD 2.38 UP 2.240