Sunday, October 30, 2016

Mapletree Greater China Commercial Trust - Impacted by margin erosion at GW

2QFY17 results summary 
MAGIC reported a 2% yoy dip in 2QFY17 revenue to S$83m while distributable income ticked down 1% yoy to S$49.1m. 2Q/1HFY17 DPU of 1.77/3.62 Scts remain broadly in line with expectations at 23%/48% of our full-year forecast. The dip in topline was due to the depreciation of the HK$ and Rmb vs. S$, and additional property tax payable for Gateway Plaza (GW), partly offset by higher rental income from Festival Walk (FW). 
FW continues to outperform
FW continued to enjoy full occupancy and rental uplift of 15%/7% over preceding levels for its retail and office spaces. Whilst shopper traffic fell 8.4% yoy in 2Q, tenant sales remained relatively stable. To date, 86% of its expiring leases have been renewed/ leased. FW has a remaining 10.6% of its leases due to be re-leased in 2HFY17 and another 21% in FY18. Whilst rental growth momentum is likely to moderate due to the overall weaker HK retail scene, we think it would still remain in positive territory. 
Margin erosion at GW from higher taxes
2QFY17 revenue and NPI from GW fell 10.9%/16.3% yoy to S$36.4m/S$30.7m due to 1) higher property taxes wef Jul 16, and 2) transition from business tax to value added tax from May 16. GW was also impacted by frictional vacancy; occupancy slipped to 90.5% while renewals were done at 8% above previous levels. Take up rate has since improved. 
Expect modest uplift from office reversions
Sandhill Plaza (SP) continued to perform well, with 99.6% of its space occupied and positive rental reversions of 23% over previous rates. Looking ahead, the weaker economic climate and higher incoming supply are likely to weigh on office rental trend and we anticipate the remaining office lease expiries at GW of 2.6% in 2HFY17 and 12.4% in FY18 to be re-contracted at modest uplifts, while SP should see higher positive reversions due to the under-rented average passing rates vs. market levels. 
80% of FY17F distributable income hedged
In terms of capital management, MAGIC has extended its debt maturity to 3.1 years with 85% of its debt in fixed rate loans. All-in cost of debt remained low at 2.89%. Income visibility is sustained with about 80% of its FY17F distributable income hedged.   
Maintain Add
We cut our FY17-19F DPU by 0.6-0.7% to factor in a higher property tax assumption for GW. Our DDM-based TP is tweaked slightly to S$1.13. We continue to like MAGIC for its largely resilient portfolio, backed by FW which makes up 71% of revenue. With gearing at 39.9%, we think there could be scope for new acquisitions in the medium term to lift earnings. Downside risks include a weaker-than-expected Beijing office leasing market, which could affect earnings and capital values of this property segment. 

Friday, October 28, 2016

Mapletree Commercial Trust - Still going strong

Strong growth from organic and acquisition drivers 
MCT delivered a 23.6% yoy increase in 2QFY17 revenue to S$88.1m (US$63.4m) while distribution income rose 25.4% yoy to S$53.6m (US$38.6m), thanks to better performance across all its assets and maiden contributions from MBC1. However, DPU only inched up a marginal 1.5% yoy to 2.05 Scts due to dilution from new units issued as well as a timing difference between income recognition of MBC1 and issuance of private placement and preference units. Excluding the latter, DPU would have been up 9% yoy. 
VivoCity continued to deliver strong showing
1HFY17 rental revenue at VivoCity rose 5% yoy to S$98.2m (2QFY17: S$49.8m), with reversions 13.8% higher over preceding levels (including tenant space renewals) and higher occupancy of 99.3%. Underlying operating conditions remained fairly robust, with tenant sales up 1.5% yoy and shopper traffic up 1.8% yoy (2QFY17: +2.7%/6.6%). Its asset enhancement initiative (AEI), at B2 and L3 to increase space utilisation and F&B kiosks, is completed; we expect ROI in excess of 20% on a stabilised basis.   
Office rents benefited from higher occupancy and positive uplift
Office rental revenue from MLHF, PSAB and Mapletree Anson rose 7% yoy to S$50.7m in 1HFY17 while MBC1 generated an additional S$12.6m, based on slightly more than a month's recognition. This was due to positive average rental reversions of 14% for office space and higher occupancy of 98.5-100%. MBC1 achieved an 8.5% increase in rents for its renewals. 
Manageable office reversions in 2HFY17-18F
MCT has 0.8% of retail and 3.8% of office leases to be re-contracted in 2HFY17, and a further 10.9% and 6.1%, respectively, in FY18. We believe VivoCity would be able to continue delivering positive showing for its renewals due to its niche location. Meanwhile, a lack of new business park supply post 2017 would be supportive of business parks rents and would have a positive knock-on impact on MBC1’s renewals, in our view. Post fund-raising gearing is higher but still healthy at 37.3% 
Maintain Add
We tweak our FY16-18 DPU estimates by -0.3% to 0.4% as we fine-tune the number of new units issued as well as the timing of completing the purchase of MBC1. However, our DDM-based target price remains unchanged at S$1.62. We believe the addition of MBC1 to MCT’s portfolio will strategically enhance the trust’s size and stability. Downside risks include a weaker-than-expected office rental market.