• Mapletree Commercial Trust’s inclusion into the STI heralds a new dawn.
• Upside catalyst will be acquisitions as investors await the injection of Mapletree Business City phase II.
• Longer term upside from progressive development of Greater Southern Waterfront region.
• Maintain BUY, Target Price raised to S$2.40.

Best in Class

• We retain our BUY call on MAPLETREE COMMERCIAL TRUST (SGX:N2IU) with a street-high Target Price of S$2.40.
• The meteoric rise in Mapletree Commercial Trust's share price following its inclusion in the Straits Times Index (STI) heralds a new dawn of heighted investor interest and liquidity for the REIT.
• As we realign our discount rates with the larger cap REITs (-10bps in WACC), our Target Price is raised to S$2.40. Furthermore, our Target Price reflects Mapletree Commercial Trust’s ability to deliver consistent DPU growth of 3% CAGR over FY20-22F, and its scarcity premium of being one of only two 100% Singapore-focused large-cap REITs.

Where We Differ: Transformative MBC II Acquisition

• Our street-high Target Price of S$2.40 prices in the acquisition of Mapletree Business City II (MBC II) in FY21 based on S$1.5bn at a cap rate of 5.1% with S$900m equity raising. As Mapletree Commercial Trust has a low cost of capital, while MBC II is within the first lease renewal cycle and has 99% committed occupancy, there is a high probability that the acquisition will take place in the coming year.
• Beyond the expected 2% DPU accretion, we believe the MBC II acquisition will elevate Mapletree Commercial Trust to become the fourth largest S-REIT. More importantly, this would position Mapletree Commercial Trust closer towards its office REIT peers which are trading at lower yields, leveraging on the optimism of the current office upcycle.

Stars Are Aligned

Government efforts to remake Greater Southern Waterfront offers significant opportunities for developers; VivoCity (owned by Mapletree Commercial Trust (MCT)) remains the bedrock of the rejuvenation of GSW in our view.

• Plans to redevelop the Greater Southern Waterfront (GSW) were first unveiled back in March-19 as part of the plans to rejuvenate the area over the next 5-10 years starting from the relocation of PSA City Terminal in Tanjong Pagar to Tuas from 2027 onwards.
• Stretching from Gardens by the Bay East area to Pasir Panjang, the GSW covers over 30km of Singapore’s Southern coastline and offers over 2,000 hectares of land for potential redevelopment, equivalent to almost six times that of Marina Bay.
• There are significant opportunities for developers as the government looks to reshape GSW as a new “live, work and play” starting with up to potentially 9,000 new residential development homes (public and private) at the current Keppel Club site which has 2 years of land lease left to run.
• VivoCity, the closest large retail mall located at the centre of the GSW masterplan, will be in our view the bedrock of the rejuvenation of the GSW. We believe the mall will benefit with the expected increase in residential apartments, working population, and new tourism elements added to the GSW over time.

New “Play” elements at Pulau Brani.

• With the moving of Pulau Brani Ferry Terminal, plans are underway to turn it to an island of fun and recreation to complement the offerings at Sentosa, Singapore’s premier tourism island, which itself is undergoing a rejuvenation anchored by the expansion of Resorts World @ Sentosa while plans to revitalise the beach area will expand its nature and heritage offerings.
• Plans for a Downtown South resort mirroring NTUC’s Downtown East resort will over time bring more holiday goers and families to the vicinity which we believe will drive visitations to both Sentosa and VivoCity.

Over 9,00 new homes at the current Keppel Club site; more office developments in the GSW to sweeten positioning of Mapletree Business City to prospective tenants.

Mapletree Commercial Trust – Another SREIT joining The High Table in the Straits Times Index

• Mapletree Commercial Trust will be included in the STI effective 23 Sept 2019, replacing Hutchison Port Holdings Trust (SGX:NS8U).
  • Mapletree Commercial Trust would maintain a weightage of 1.5% in the STI.
  • This is in line with market expectations as seen by the 13% Mapletree Commercial Trust's share price appreciation since the beginning of Aug-19.
  • While some investors might take some profit post the news, we believe Mapletree Commercial Trust's share price will remain elevated in anticipation of the potential injection of Mapletree Business City Phase 2.
  • While the timing is still uncertain, we believe Mapletree Business City Phase 2, anchored by key tenants like Google, will be widely seen as a positive addition to the REIT.
  • In addition, Mapletree Commercial Trust’s intention to stay as a “pure-play Singapore REIT” will remain as an attractive quality to investors.

Raising Our Target Price to S$2.40

• We relooked at our cost of equity assumptions and now lower our WACC by 10bps to account for the REIT’s larger liquidity status, similar to the larger cap REITs.
• Our Target Price is thus raised to S$2.40 from S$2.25.
• Our assumptions include the acquisition of Mapletree Business Phase II for S$1.5bn @ 5.1% yield. We have assumed 60% of the purchase to be funded by new equity.

Source: DBS Research - 9 Sep 2019