Mapletree Commercial Trust - OCBC Investment 2019-10-04: A Giant Step Forward


Mapletree Commercial Trust - A Giant Step Forward

  • Initial NPI yield of 5.0%.
  • Strong tenants such as Google.
  • Raise Fair Value significantly to S$2.28.

Positive on proposed acquisition of Mapletree Business City II –

  • We like MAPLETREE COMMERCIAL TRUST (SGX:N2IU)’s recent proposed acquisition of Mapletree Business City (Phase2) (MBC II) as it ticks all the boxes of a solid transaction. Based on the agreed property value of S$1,550m, it translates into an initial NPI yield of 5.0%, which is higher than Mapletree Commercial Trust’s existing portfolio FY19 NPI yield of ~4.7%.
  • Mapletree Business City (Phase2) (MBC II) also has strong operating metrics, with near-full committed occupancy of 99.4% which comprise mainly high quality reputable MNCs. Google’s Asia-Pacific headquarters, which is located in this property, contributed 58.1% of the property’s gross rental income (as at 31 Aug 2019) and is the largest tenant, followed by Cisco Systems (USA) Pte. Ltd. (6.9%) and Covidien Private Limited (4.6%).
  • Approximately 97% of MBC II’s leases are embedded with average annual rental step-ups of ~2.3%.

Valuation uplift –

  • Separately, Mapletree Commercial Trust carried out an independent valuation exercise on its portfolio, which resulted in a valuation uplift of S$311m as compared to its 31 Mar 2019 valuation. There were slight compression in cap rates by 10 bps for office and 15 bps for business park, but VivoCity saw a mild cap rate expansion by 2.5 bps.

Bumping up our fair value –

  • Based on Mapletree Commercial Trust’s illustration, assuming debt-to-equity funding mix of 45-55%, equity issuance price of S$2.10 per unit and cost of debt of 2.9%, accretion to pro forma FY19 DPU and NAV is expected to be 4.0% and 2.2%, respectively. We believe there is upside potential to this given Mapletree Commercial Trust’s current share price, positive attributes to this transaction and strong demand for equity offerings from high quality REITs. See Mapletree Commercial Trust share price.
  • After fine-tuning our assumptions which include incorporating higher organic growth for its existing portfolio and the proposed MBC II transaction, we lift our FY20 and FY21 DPU forecasts by 0.6% and 7.0%, respectively. We also raise our terminal growth input to 2% and lower our cost of equity assumption from 6.4% to 6.2%. Correspondingly, our fair value estimate is bumped up from S$1.89 to S$2.28.
  • Based on Mapletree Commercial Trust’s last closing price of S$2.32 and our forecasts, FY20F and FY21F distribution yields are 4.0% and 4.3%, respectively. See Mapletree Commercial Trust's dividend history.
  • Our end-FY20 gearing ratio projection is 34.2%.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-10-04
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