• Mapletree North Asia Commercial Trust 2Q/1HFY3/20 DPU of 1.937/3.887 Scts was in line at 24%/49% of our FY20 forecast.
• There were positive reversions at FW in 2Q but outlook for 2HFY20 is more muted.
• We maintain our ADD call with a DDM-based Target Price of S$1.47.

Mapletree North Asia Commercial Trust 2QFY3/20 Results Highlights

• MAPLETREE NORTH ASIA COMMERCIAL TRUST (SGX:RW0U) reported a 0.9% y-o-y rise in 2QFY3/20 revenue to S$105.5m thanks to better performances at Festival Walk (FW), Sandhill Plaza (SP) and Japan properties, partly offset by weaker Gateway Plaza (GW). Distribution income grew 1.5% to S$61.7m while DPU rose 0.6% y-o-y to 1.937 Scts. See Mapletree North Asia Commercial Trust Announcements; Mapletree North Asia Commercial Trust Dividend History.
• 2Q portfolio occupancy remained high at 98.9%, although slightly lower q-o-q, due to a dip in Gateway Plaza occupancy.

Positive Rental Reversion in 1HFY20 But Outlook Becoming Muted

• In tandem with the softer HK retail sales (-9.3% y-o-y from Apr-Aug 19) due to subdued domestic demand from ongoing tensions, Festival Walk saw a 6.6% and 3.6% y-o-y decline in tenant sales and shopper traffic respectively, in 1HFY20.
• Nonetheless, Mapletree North Asia Commercial Trust continued to enjoy positive rental reversion of 12% and 6% for its retail and office renewals in 1HFY20.
• Mapletree North Asia Commercial Trust has 9.8% of portfolio income left to be renewed at Festival Walk for the rest of FY20F and 14.9% in FY21F. Rental growth outlook has moderated given the ongoing tensions in HK. However, management still expects to achieve positive reversions, albeit at a slower pace, for the remainder of FY20.

Drag From Gateway Plaza Due to Weaker Macro and Supply Dynamics

• Gateway Plaza saw negative 4% reversion for leases renewed in 1H due to a more cautious macro environment and increased new office supply. Outlook for 2HFY20-FY21F remains challenging, in our view. But with a moderate 2.6% of portfolio gross rental income to be re-contracted at this property for the rest of FY20F and 2.6% in FY21F, we anticipate the impact of slower contributions to be muted.
• Sandhill Plaza enjoyed a positive uplift of 10% for 1H lease renewals and is expected to benefit from continued demand for more affordable business park space.

Robust Balance Sheet

• Gearing stood at 37.1% at end-2QFY20 with robust interest cover ratio of 4.2x. An estimated 89% of Mapletree North Asia Commercial Trust's debt is on fixed rates and only 14% of its total debt is due to be refinanced in FY20-21F.
• With slower organic outlook, we anticipate Mapletree North Asia Commercial Trust to also drive acquisition growth potential. Its focus remains in North Asia, within its current footprint as well as potentially expanding interest to new geographies such as Korea.

Maintain ADD

• We trim our FY21-22F DPU estimates by 0.4-0.6% as the softer retail HK market and prolonged domestic protests may cause some near term headwinds. Our DDM-based Target Price is thus lowered to S$1.47. (see Mapletree North Asia Commercial Trust Share Price; Mapletree North Asia Commercial Trust Target Price)
• Share price catalysts include a recovery in HK retail sales while downside risks include protracted slowdown.

Source: CGS-CIMB Research - 29 Oct 2019