• We see value emerging for Mapletree North Asia Commercial Trust (SGX:RW0U) at 0.56x P/NAV and forward prospective yields of > 9.0%.
• While investors’ concerns on the impact of the COVID-19 outbreak on Festival Walk remain valid, we believe that such negatives are priced in at this level. The stock is trading in excess of 2.0% spread against top 10 S-REITs and 3.0% against HK retail peers, levels that we have not seen in the past five years.
• BUY maintained, Target Price adjusted to S$1.05 as we price in higher equity risk assumptions with revised DPU estimates.

More Resilient Than Previously

• Mapletree North Asia Commercial Trust's share price has been under pressure of late, together with the declines seen in the S-REIT sector in March’20. While fundamentals may have deteriorated due to the COVID-19 outbreak, we believe that the close-to-40% slide in share price within a month is excessive for the stock.
• At a P/NAV of 0.6x and prospective yields in excess of 9%, we advocate investors to relook at Mapletree North Asia Commercial Trust at current levels.

More Diversified Portfolio Enables MNACT to Weather the COVID-19 Storm

Diversifying away from Festival Walk a right strategy for the REIT.

• Mapletree North Asia Commercial Trust’s fortunes have long been associated with the performance of its anchor asset, Festival Walk. We would like to highlight that, while Festival Walk remains a key driver to Mapletree North Asia Commercial Trust’s earnings stream, its reliance will diminish over time. This is given the manager’s strategy of diversifying its income streams through strategic asset acquisitions, especially in the commercial office sector in Japan.
• Through acquisitions, we project that from FY21F onwards, Festival Walk’s contribution will decline to 55% of net property income, from the average of 60-62% previously. The concerted efforts to diversify its earnings will provide Mapletree North Asia Commercial Trust with increased income stability and put it in better stead to ride out the current instability in Hong Kong’s retail scene.

More resilient income profile with Japan.

• The recent acquisition of a portfolio of office properties in Japan will start contributing from 4QFY20 and will be a driver to revenues going forward. Meanwhile, Festival Walk mall will continue to further step up its income as its operations stabilise going into FY21.
• Based on our estimates, we see Mapletree North Asia Commercial Trust being a more stable vehicle going forward with contribution from a wider geographical source.

Festival Walk to See a Temporary Disruption; But Earnings Momentum Will Continue in the Medium Term

Festival Walk – temporary weakness but it will rise again.

• The onset of the COVID-19 outbreak has been a spanner in the works for the continued operational pick-up for Festival Walk in the near term. Worries of the spread of the virus have prompted authorities to limit tourist travels while locals have curbed their spending (shopping and entertainment). This is expected to hit foot traffic at the mall and tenant sales.
• The manager has done a stellar job in limiting the closure of Festival Walk to just 64 days and reopening in Jan’20, with committed occupancy rates at a robust 100% as of end-December 2019. That said, the near-term disruption from the COVID-19 outbreak is expected and we anticipate a near-term reset to expectations of Festival Walk returning back to full capacity.
• With the current situation remaining fluid and the increased risk aversion by consumers to stay home, it will likely hit the retail scene hard. According to media reports, we understand that various landlords in Hong Kong have been proactively cutting their rentals, especially to the Food & Beverage (F&B) sector which is the most impacted.

Earnings revision; but Mapletree North Asia Commercial Trust still offers a 9.0% prospective yield.

• In our revised estimates, we have now assumed occupancy rates for Festival Walk to dip slightly to 95% in FY21 and rental reversions to dip by 10% (vs +2% previously). This is in line with our Hong Kong analyst expectations that retail rents will fall by 15-25% in 2020. The more resilient performance is due to Festival Walk’s historical outperformance vs the overall market given its focus within the less discretionary consumer trends and its less reliance on tourists as a target market.
• Our estimates are revised down by 2% and 4% for FY20F and FY21F respectively. Our Target Price is adjusted down as we hiked up our beta estimates to account for higher cost of equity in recessionary conditions.

Solid Portfolio Which Can Withstand An Expansion in Cap Rates

Portfolio valuation should remain relatively stable; gearing levels are comfortable.

• While there are questions regarding potential weakening of capital values, especially for Festival Walk in light of the past protests in Hong Kong and the COVID-19 outbreak, we estimate that it will take a close to 150-bp expansion in cap rates for Festival Walk’s valuation for the REIT to breach its gearing limit of 45%.
• On a portfolio basis, it will take an expansion of more than 70-100bps in cap rates before the REIT will burst its 45% gearing limit, implying that valuation shifts of up to 15% can be tolerated. These are unlikely scenarios given that valuers usually take a longer-term view on cashflows and the lack of major transactions supporting such a significant shift in cap rates. Hence, we believe that current prices at close to 0.6x P/NAV, implying a cap rate of 6.0%, are excessively high and unwarranted.

Strong Access to Debt Capital Markets

Long weighted average debt expiry (WADE).

• Mapletree North Asia Commercial Trust has a WADE of 3.13 years (as of 31 Dec’19 and only 7% [S$212m] of its total debt up for renewal by Mar’20 and another 7% of debt [S$209m] due by Mar’21. Given the relatively small quantum, we do not anticipate refinancing risks in the medium term.

Attractive Yields

Attractive yields in excess of 9.0%.

• With revised estimates, Mapletree North Asia Commercial Trust still trades at an attractive P/NAV of 0.56x and prospective yields of 9.0%, which is more than 2% and 3% higher than the average yields of top 10 S-REITs and HK peers respectively. Acknowledging the earnings uncertainty from Festival Walk, we believe that these negatives are priced in at current Mapletree North Asia Commercial Trust Share Price.
• Surprises will hinge on Mapletree North Asia Commercial Trust’s ability to deliver better-than-projected growth in operational income for its portfolio and Festival Walk, where such concerns will be mitigated over the longer term.

Source: DBS Research - 3 Apr 2020