• Mapletree Commercial Trust's 4Q19 DPU of 2.31 Scts (+2% y-o-y) drives record annual DPU of 9.14 Scts (+1% y-o-y).
• VivoCity delivers again with 4Q19 NPI up 4.5% y-o-y despite dip in tenant sales during fit-out period ahead of new NTUC Fairprice hypermarket.
• 5.4% positive rental reversion to power earnings ahead.
• Awaiting potential acquisition of MBC 2.

Closing the Year in Style

• Confounding the critics. We retain our BUY call on MAPLETREE COMMERCIAL TRUST (SGX:N2IU) with a street high Target Price of S$2.00.
• Mapletree Commercial Trust’s detractors believe that Mapletree Commercial Trust is due for a de-rating given the threat of e-commerce that can affect earnings at its key asset VivoCity. However, this ignores management’s ability to undertake asset enhancement initiatives (AEIs) to partially future-proof the mall against other competing malls and the online space. Evidence of this value-add was the achievement of an ROI of 10-40% from the AEIs and the bonus 24,000 sqft of GFA Mapletree Commercial Trust obtained by adding a library to the mall. We believe these proactive decisions will underpin the 2% DPU CAGR over the coming three years.

Where We Differ: Best in Class

• Consensus Target Price of S$1.80 implies P/Bk of 1.13x which is too low considering Mapletree Commercial Trust owns two of the best-in-class retail and office/business park assets and VivoCity is only valued at a cap rate of 4.6%, higher than recent mall transactions at 2.6-4.2% for arguably less-dominant malls.
• As Mapletree Commercial Trust continues to demonstrate its ability to deliver consistent DPU growth, and the market prices in the scarcity premium of being one of only two 100% Singapore-focused large-cap REITs, we believe Mapletree Commercial Trust will re-rate towards our street high Target Price of S$2.00, which implies a sub-5% yield that is consistent with other premium large-cap office and retail REITs.

Improving Office/retail Market

• We believe improving Singapore office rents and retail market should allay fears that Mapletree Commercial Trust does not have levers to drive DPU growth despite maturity of VivoCity and support a further re-rating in Mapletree Commercial Trust’s share price.

Valuation

• We retain our DCF-based Target Price at S$2.00. With 9% capital upside and 5.1% yield, we maintain our BUY call.

Key Risks to Our View

• A key risk to our positive view is a slowdown in retail sales affecting VivoCity’s ability to increase rents, and a slower-than-expected pick-up in office/business park rents.

What's New - Hitting a New High

Record FY19 DPU

• Mapletree Commercial Trust reported 4Q19 DPU of 2.31 Scts (+1.8% y-o-y) taking FY19 DPU to a record high of 9.14 Scts (+1.1% y-o-y) which was in line with our FY19 DPU forecast of 9.12 Scts.
• The 4Q19 results were underpinned by 3.7% and 3.9% y-o-y increase in revenue and NPI to S$112.9m and S$87.6m respectively, as Mapletree Commercial Trust’s core asset VivoCity continues to deliver.
• The results could have been better if not for the impact of higher borrowing costs.

From strength to strength

• Despite the disruption due to the recent AEIs and closure of Giant supermarket to facilitate a changeover to a new hypermarket by NTUC Fairprice which caused 3.7% and 4.5% y-o-y dip in 4Q19 shopper traffic and tenant sales respectively, VivoCity remains resilient and a consistent performer.
• 4Q19 revenue and NPI for the property jumped 4.9% and 5.9% respectively on the back of higher effective occupancy (99.4% versus 93.1% in 4Q18 impact of AEI’s) as well as prior positive rental reversions.
• For the whole of FY19, VivoCity reported a healthy 3.5% uplift in rents which was an improvement on the 1.5% rental reversion recorded for FY18.
• Beyond the boost from opening of the new hypermarket by NTUC Fairprice in 2Q20 and recently opened library which draw additional footfall, the conversion of the former Giant space has allowed Mapletree Commercial Trust to recover 24,000 sqft on Level 1 and Basement 2 which can be leased out to higher-paying tenants. We understand this recovered space has been pre-committed to various fashion, mid-range family-oriented eateries and halal options.
• The recovered space is expected to yield an ROI of 40%, based on an estimated capex spend of S$2.2m.

Mixed performance in office/business park portfolio

• Mapletree Business City 1 (MBC1) reported a 0.4% and 2.2% y-o-y dip in 4Q19 revenue and NPI respectively, largely due to the impact of lower physical occupancy of 97.8% versus 99.4% a year ago, as well as negative rental reversions for some prior renewals.
• With committed occupancy slightly higher at 98.1% and in-built rental escalation, we expect contribution from MBC 1 to remain steady going forward.
• Mapletree Commercial Trust’s other office properties had a stronger quarter with MLHF and PSA Building delivering a 5.5% and 14.7% y-o-y increase in 4Q19 NPI. MLHF and PSA Buildings benefitted from higher rents with occupancy for both buildings high at 100% and 96.4% respectively.
• Meanwhile, contribution for Mapletree Anson was flat y-o-y.
• For the whole of FY19, the office/business park portfolio reported 10.3% rental reversions or 8.7% including rent reviews. This a recovery from the 8.7% drop recorded in FY18. While rental reversions are healthy largely due to a tenant renewing on a short-term lease at PSA Building, when the lease ends in a year or two, Mapletree Commercial Trust may report negative rental reversion when this particular tenant moves out.

10-15bps compression in cap rates

• Mapletree Commercial Trust’s valuers compressed the cap rates used to value Mapletree Commercial Trust’s properties by 10-15bps on average which translated into a 5.3% increase in property values to S$7.0bn.
• VivoCity is now valued using a cap rate of 4.6% versus 4.75% previously.
• For MBC I, a cap rate of 4.0% and 5.1% was applied for the office and business park component respectively, down from 4.1% and 5.35% previously.
• Meanwhile, cap rates for PSA Building (office), Mapletree Anson and MLHF now stand at 4.1% (4.2% previously), 3.6% (3.7%) and 4.0% (4.1%) respectively.
• As a consequence, Mapletree Commercial Trust’s gearing fell to 33.1% from 34.8% and 34.5% at end-December 2018 and March 2018 with NAV per unit now at S$1.60, up from S$1.49 a year ago.
• Average cost of debt was relatively stable q-o-q at 2.97% although up from 2.75% at end-4Q18.
• The proportion of fixed rate debt remains high at 85%.

Awaiting potential MBC 2 acquisition

• As Mapletree Commercial Trust is currently trading on a 5% FY20F yield, many investors we had spoken to believe now is an opportune time to acquire MBC 2. MBC 2 is a 1.2m sqft business park that is currently owned by Mapletree Commercial Trust’s Sponsor, Mapletree Group. The property is second phase of the overall Mapltree Business City development and is situated behind MBC 1.
• Assuming a 60/40 equity to debt split, 5% DPU yield and 3% cost of debt, the weighted average cost of capital is 4.2%, which is below 5.1% cap rate for the business park component of MBC 1. Under this scenario, a potential acquisition of MBC 2 should be DPU accretive.
• Management guided that any potential acquisition is subject to willingness of its Sponsor to sell the asset which at this point in time we have no visibility over.

Maintain BUY, Target Price of S$2.00

• With 1Q19 results in line with expectations, we maintain our BUY call with a street high Target Price of $2.00, but tweak our FY20-21F DPU 1% higher due to slightly higher earnings from VivoCity.
• We continue to like Mapletree Commercial Trust for its resilient income stream, best-in-class assets, as well as an expected improvement in DPU on the back of 5.4% rental reversion recorded for its overall portfolio in FY19 and upturn in the Singapore market.

Source: DBS Research - 25 Apr 2019