Mapletree North Asia Commercial Trust - DBS Research 2019-10-29: Festival Walk Goes The Extra Mile


Mapletree North Asia Commercial Trust - Festival Walk Goes The Extra Mile

  • Mapletree North Asia Commercial Trust's 2QFY20 results shine as Festival Walk remains a rock.
  • Operating metrics stable as key asset – Festival Walk continues to churn positive reversions.
  • Positioned for acquisitions to diversify its earnings base.
  • BUY call are maintained with Target Price at S$1.60.

Holding its fort.

Moving forward together

DPU in line; major assets continue to perform.

  • Mapletree North Asia Commercial Trust continued to report resilient 2QFY20 results with gross revenues and net property income rising by 0.9% and 1.23% y-o-y to S$105.5m and S$84.7m respectively. See Mapletree North Asia Commercial Trust Announcements. Distributable income came in at 1.5% y-o-y to S$61.7m, translating into a DPU of 1.937 Scts. On a 1H20 basis, DPU came in at 3.89 Scts (+2.1% y-o-y); forming 49% of our full-year forecasts. See Mapletree North Asia Commercial Trust Dividend History.
  • Given that seasonality of its earnings profile (2H of financial year typically contributes c.51-52% of full-year performance), results momentum is tracking in line with our forecast.
  • The stronger performance was led by higher rentals achieved at Festival Walk in Hong Kong (HK), which was partially aided by the strengthening HKD and JPY vs the SGD, offsetting the impact of a lower average RMB rate. Net property income rose by a higher percentage due to the manager keeping a tight lid on operating expenses with lower marketing expenses at Festival Walk and Gateway Plaza and foreign currency movements.

All eyes on Festival Walk (62% of revenues): Still holding up; stronger relative performance vs industry.

  • Festival Walk’s organic growth continued to grind ahead. Festival walk maintained a full occupancy rate as usual and reported c.12% average positive rental reversions for 1H20 (1Q19 at 12%) and +6% for its office spaces. The manager has renewed/re-let 85% of the leases expiring as of September 2019.
  • Footfall for 1H20 fell 3.6% and tenant sales dipped 6.6% in 1H20. We estimate that 2Q20 metrics were slightly weaker (at -4.9% for footfall and -10% for tenant sales, brought down by a more subdued consumer sentiment and disruption from uncertainty brought about by the protests in Hong Kong.
  • We, however, note that Festival Walk’s operational metrics are more resilient compared to the Hong Kong retail sales statistics which on a comparable year basis, contracted by 9.3% (April-August 2019) and dipped by 11.5% and 23% y-o-y respectively. Occupancy costs inched higher to c.20.8%, which could be a cap, in our view, on the ability for the mall to achieve material rent increases from current levels.
  • Looking ahead, given the uncertainty and more subdued sentiment in Hong Kong, we expect Festival Walk’s performance to be more moderate but will likely to continue outperforming the sector’s given its positioning towards more daily necessity shopping and entertainment.
  • The feedback from tenants while cautious, is not alarming at this point. The manager maintains that they will continue to invest in promotional activities to bring in more foot traffic in the hope of bringing more sales. In addition, given the year-end festivities (Christmas/Chinese New Year), the manager hopes to see the return of consumer spending.

Gateway Plaza and Sandhill Plaza (25.9% of revenues): successful efforts to sustain occupancies.

  • Gateway Plaza: The manager’s continued efforts to keep occupancy rates amid more modest office demand and new supply has kept occupancy relatively resilient at 96.5% (vs 97.2% in 1Q20) with rental reversions of -4% in 1H20 (vs -5.0% in 1Q20). The manager is also working on various AEIs, albeit small ones to continue improve the attractiveness of the asset.
  • Sandhill Plaza: Operational metrics are stronger at Sandhill with 10% rental reversion as of 1H20 (33% in 1Q20) while occupancy remains at a high 99.3%. The property’s value proposition of offering lower rents continues to attract firms from the new media and IT sectors to continue to expand there.

Japan: (12.2% of revenues): Strong operational metrics

  • Occupancy rates remained high at 100% with positive rental reversions of 6.0% for 1H20 (6% in 1Q19).
  • Looking ahead, the manager anticipates some occupancy flux for one of its smaller office properties (conversion of single-user to multi-tenancy), while some impact of occupancy rate is anticipated, the impact on the overall portfolio is small and manageable.

Financial metrics remained stable

  • Gearing inched up slightly to 37.1% (vs 36.6% in March 2019) which we believe is due to translation of its overseas currency (assets/liabilities) to SGD. Interest rate was at 2.49% (vs 2.43% in 1QFY19). The manager has maintained a higher percentage of fixed interest rates of 89% (vs 86% a quarter ago).

Revising estimates downwards on more conservative assumptions.

  • We have revised down our rental reversion estimates to a single digit in FY20 and flat in FY21 for Festival Walk, resulting in a 2.0% cut to our DPU estimates. Even at this price, we believe that a 6.3% yield is attractive as it is more than 80bps higher than the S-REIT average. See Mapletree North Asia Commercial Trust Dividend History.

Looking to further diversify its earnings base.

  • The manager continues to look for opportunities to grow Mapletree North Asia Commercial Trust and diversify its earnings base. Acquisitions remain one of the key diversification strategies and the manager is looking at opportunities in its core markets of China and Japan.
  • The sponsor continues to offer a visible pipeline of office and retail properties in Tokyo that the manager may look to acquire in the medium term when the opportunities arise. In China, the opportunities are more limited for now and the manager is not keen to acquire the retail malls.

Where we differ: Festival Walk to show its mettle.

  • With Mapletree North Asia Commercial Trust's fortunes tied closely to the outlook for its key asset – Festival Walk (62% of net property income), we believe that the mall should be able to hold its fort in the wake of weaker retail sentiment in Hong Kong. We see the mall demonstrating resilience against expectations of a fall in revenues, as seen in other retail malls in Hong Kong. This is on the back of
    1. positioning towards more resilient trade sectors (F&B, entertainment and supermarket), and
    2. limited exposure to tenant sales volatility as the gross turnover (GTO) contribution to top line is < 3% of portfolio revenues, limiting the impact of an expected drop in retail sales.
  • We have moderated our assumptions further to assume flattish reversions in FY21F.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2019-10-29
SGX Stock Analyst Report BUY MAINTAIN BUY 1.60 DOWN 1.650