• VivoCity should continue to benefit from the stronger tourist arrivals and continuous AEIs.
• We expect Mapletree Commercial Trust’s office/business park segment’s performance to be stable.
• Maintain ADD with a lower target price.

VivoCity to Complete AEI by 2HFY19

• To recap, Mapletree Commercial Trust’s VivoCity delivered a strong positive rental reversion of 4.1% in 1HFY19, driven by the replacement of Giant by Fairprice NTUC and the completion of AEI on B1. 1HFY3/19 shopper traffic rose 3.1% while tenant sales declined 0.7% y-o-y, boosted by strong shopper traffic (+5.8% y-o-y) and tenant sales (+2.8% y-o-y) in 2QFY18, driven by the “Disney Tsum Tsum” event that was held in Sep 2018.
• The recent S$16m AEI for VivoCity is slated to be completed by 2HFY19 upon the opening of the 32k sf public library. The extension of 24,000 sf gross floor area on B1, which is part of the AEI, was opened in June 2018.
• VivoCity has been reporting strong rental reversions in the past few years due to the continuous AEIs. While we expect rental reversion to slow down from double digits in the absence of major AEI in the near term, we believe that the trust will continue to revamp the mall in view of its past track record. Due to its location near Sentosa, it should also benefit from the strong tourist arrivals recently.
• In the longer term, VivoCity is expected to benefit from the government’s recent plans to redevelop Sentosa and brand Sentosa as the “Southern Gateway of Asia”.

Expect Stable Performance From Office Segment

• The negative rental reversion of -1.1% in 1HFY19 was mainly due to weaker performance of the PSA Building, and Mapletree Anson to a lesser extent. However, we expect the performance to improve in the coming quarters as committed occupancy rates are high at 99.2% and 97.8%, respectively.
• MBC I, on the other hand, reported positive rental reversion in 1HFY19 after the inclusion of rent review with 97.8% occupancy. Meanwhile, MLHF (Bank of America Merrill Lynch HarbourFront) provides stable cash flow with 100% occupancy.
• We expect its office segment to deliver stable income, driven by MBC I and MLHF which should offset any weakness from PSA Building and Mapletree Anson. Its office assets could partially benefit from the recovery in office rents due to its non-CBD locations. The high expiry profile of MBC of 40% in FY21 is something to watch for.

Maintain ADD

• We maintain ADD with a lower DDM-based target price as we raise our risk-free rate assumption. Minor tweaks in DPU estimates are due to house-keeping exercise.
• We continue to like
  1. VivoCity which is positioned as a destination mall which should see lower pressure from industry headwinds, and
  2. MBC I as a Grade A business park which Singapore lacks.
• Acquisitions could catalyse the stock. Risks include worse-than-expected rental growth.

Source: CGS-CIMB Research - 15 Nov 2018