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.   

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