Tuesday, August 02, 2016

Mapletree Greater China Commercial Trust - Staying resilient

Buoyed by FW and SP 
MAGIC reported 1QFY17 revenue of S$85m and NPI of S$69.4m, up 12% and 11% yoy, respectively, as higher Festival Walk (FW) and Sandhill Plaza (SP) contributions offset lower Gateway Plaza (GW) performance. After netting off higher interest expense (from the acquisition of SP), distribution income grew 10.6% yoy to S$51.3m. 1QFY17 DPU of 1.85 Scts, +9.1% yoy, was in line with our expectations, making up 24.5% of our FY17 projection. There was little overall forex translation impact during the quarter. 
Reopening of cinema to boost entertainment and F&B businesses
FW’s revenue and NPI rose c.10%/9% yoy to S$60m/S$47.1m, thanks to positive rental reversion of 11-13% for its office and retail renewals. This was despite a 13% drop in tenant sales and shopper traffic with ongoing renovations of a new cinema tenant and a challenging HK retail environment. The cinema operator reopened in June; this should translate to higher entertainment and F&B contributions. With a remaining 23% of leases at the property to be re-contracted this year, we expect rental uplift to remain robust. 
More competitive operating environment for GW
The weaker showing at GW was offset by a full quarter’s contributions from SP. GW reported an 8% dip in NPI to S$16.9m due to i) a decline in occupancy to 95% owing to the more competitive leasing environment with high incoming supply, ii) impact of VAT implementation, and iii) a depreciation in RMB. 1QFY17 rental uplift was a modest 6% and we expect rental growth to remain moderate, although completion of the AEI which added 800 sqm of F&B space should enhance tenant experience. 
SP enjoyed strong occupancy with good rental uplift
On the other hand, SP reported a 28% improvement in renewal rents and full occupancy on healthy demand for business parks space during the quarter due to a decentralisation trend in Shanghai. With cost savings, favourable tax incentives and improved accessibility, we anticipate this segment of the market to continue to perform well. 
Strong income visibility
To ensure good income visibility, MAGIC has increased the proportion of fixed rate debt to 80% and hedged 62% of its FY17 distributable income. Gearing is steady at c.40%. It has about 14% of its debt to be refinanced for the remainder of FY17. 
Maintain Add
We continue to like MAGIC for its resilient portfolio, underpinned by FW, and good earnings visibility. With gearing at 40%, we think there could be scope for new acquisitions in the medium term. We tweaked our DDM-TP to S$1.14 following this set of results. Given the total return upside of 13% to our TP, we maintain our Add call. Downside risks to our call include weaker than expected Beijing office leasing market.

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