Mapletree Commercial Trust - Mixed results

2Q performance boosted by better retail contributions
MCT’s 2Q and 1HFY3/18 DPU of 2.24 Scts/4.47 Scts was in line with our projections, accounting for 25.6%/51.2% of our FY18 forecast. The 9.3% rise in DPU was due to a 22%/23% expansion in revenue and NPI respectively, thanks to the acquisition of Mapletree Business City 1 (MBC1) and better performance at VivoCity. This was partly offset by weaker contributions from Merrill Lynch Harbourfront (MLHF), PSA Building (PSAB) and Mapletree Anson. Portfolio occupancy stood at 97.6%, slightly weaker qoq.  
 
Robust performance at VivoCity
VivoCity posted a 4% rise in revenue to S$102.2m in 1HFY3/18 (+3.2% in 2Q) led by positive rental reversions of 2% from new and renewed leases post the completion of AEI at B2, L1 and 3. Tenant sales rose 1.1% yoy in 1H while shopper traffic held steady. The uplift in rents was slightly higher than the 1.7% reported in 1Q. It has a remaining 2.5% of retail income expiring in 2HFY3/18 and another 18.4% in FY3/19. We expect rental outlook to remain positive but modest over the medium term.
 
Office revenue could stabilise in coming quarters
Office/business park portfolio saw a 9.2% decline in 1H. Excluding MBC1, other office assets experienced a 4.4% dip in re-contracted rents. Inclusive of rents from a replacement tenant for a pre-terminated lease, office portfolio rental reversion would have been +0.1%. Looking ahead, we believe office rental revenue should remain relatively stable on higher pre-committed occupancy of 97.4-100% (vs. 91.6-94.4% 
as at end 2Q). The trust has 0.6% of office lease to be renewed in 2HFY3/18 and 7.2% in FY3/19

Healthy balance sheet
Gearing is at a healthy 36.4% with no refinancing needs for the remainder of FY18. About 78% of its debt is in fixed rates and all in cost of debt is at 2.7%. MCT plans to conduct a new AEI to add a 3,000 sq m library on L3 of VivoCity. This will free up some bonus GFA for the property which can be used to extend the leaseable area at B1. This exercise is expected to cost c.S$10m and can be funded with its robust balance sheet. When completed in 3QFY19, this could further boost earnings and property returns at VivoCity.  
 
Retain Add rating
We tweak our FY18-20 DPU estimates post results as we update the portfolio lease expiry profile. Accordingly, our DDM-based target price is lowered slightly to S$1.75. We believe MCT’s earnings are likely to remain stable underpinned by better performance at VivoCity and office rental income. In the longer term, a lack of new business parks supply should be supportive of rents. Risks are continued drag on retail and office rents.

Frasers Logistics & Industrial Trust - Why you can keep FLT in your pocket

Why you can keep FLT in your pocket
FLT’s ability to tap FCL's Australian development pipeline (via FPA), and a favourable Australian industrial market are two key investment merits for the REIT. This is especially as there is an increasingly low availability of prime assets in Australia, mopped by capital chasing core assets. This puts FLT at an advantage vs. the other S-REITs which are diversifying into Australia. Further, its maiden portfolio acquisition of seven properties (mix of completed and development assets) demonstrates strong sponsor commitment.
 
FLT could maintain A$150m-200m acquisition rate over FY18F-19F
Given FPA’s development pipeline of A$850m (based on completed value), we believe FLT could maintain an acquisition rate of A$150m-200m over the next two years. If we were to incorporate this, we would derive a DDM-based TP of S$1.23. Thinking longer term (>three years), as Australian property market peaks and contingent on market cycles, we cannot exclude the possibility that FLT could acquire European assets from Geneba Properties, FCL’s newly acquired European logistics and industrials platform.
 
Australian industrials in an up-cycle
Our desktop research found the Australian industrials remaining firmly in an up-cycle. We highlight some of the metrics tracked by Knight Frank which include vacancy, take-up and average letting up period. These metrics all point to an “up”. In summary, Sydney remains the strongest market, thanks to limited available space and strong economic activity. Melbourne is also benefiting from good demand and population growth. Brisbane remains challenging but the worst is likely over, in our view. 

Raising FY18F-19F DPU by 2.8-4.6%
We incorporate FLT’s first portfolio acquisition of seven properties (valued at A$169.3m or initial portfolio yield of 6.41%) as well as the accompanying equity fund raising (private placement of 78m new units at S$1.01/unit) into our earnings model. To reiterate, we view the portfolio acquisition positively given the quality characteristics (long WALE of 9.6 years, 100% take-up) as well as the evident sponsor commitment.
 
Maintain Add with higher TP of S$1.2
Along with our DPU upgrade and the rolling forward of our DDM valuation, our target price is raised from S$1.10 to S$1.20. We maintain our Add rating, projecting total returns of 17% for FY18F (upside of 10.3% + FY18F yield of 6.7%). FLT is due to report its 4QFY17 results before trading hours on 2 Nov 2017. Nearer-term re-rating catalysts could be portfolio cap rate compression. We believe FLT's operations would remain steady. Downside risk could be an unexpected downturn in Australian industrials.

Aspen (Group) Holdings Ltd - A gem in the North

Company background
Aspen (Group) Holdings (Aspen) is a property development and real estate investment group based in Malaysia. Aspen’s key value proposition is its niche in the value-added affordable mass residential market in Penang. It also has a strategic relationship with Ikano Pte Ltd as the joint owner of the Bandar Cassia Shopping Centre and joint master developer for the mixed development Aspen Vision City (AV City) in Bandar Cassia, Batu Kawan.
 
Unique value-added residential development model
In addition to understanding its customer needs and aspirations, Aspen’s unique business model of providing value-added packages to its homebuyers allows it to upgrade its development margins while maintaining its exposure to the large affordable housing market. Tri Pinnacle, the first of such projects, was well received and is currently 82.2% pre-sold.  
 
Riding the Batu Kawan growth wave, strategic Ikano partnership
AV City is a joint development between Aspen and Ikano. In addition to being located in the up-and-coming Batu Kawan area, the mixed development will have an IKEA store and Bandar Cassia Shopping Centre. This IKEA store is likely to be the only one in the North of Peninsula Malaysia. These two complexes would increase the attractiveness of this township, in our view. In addition, an attractive land payment structure would ensure an asset-light landbanking strategy.

Strong earnings CAGR, high ROE
Based on the schedule of project completions, we expect Aspen to post 245% revenue CAGR in FY16-18F and 228% gross profit CAGR in FY16-18F. We arrived at these figures based on the RM1.26bn unrecognised locked-in residential sales at end-Jun 2017, largely from Tri Pinnacle and Vervea. Owing to the group’s strong profit recognition profile, we believe its FY17-18F ROE is likely be superlative at 35.4%.
 
Initiate coverage with Add rating
We value Aspen’s RNAV at S$0.53/share, taking into account the discounted potential profits and the IPO proceeds raised recently. Our target price of S$0.29 is premised on a 45% discount to end-FY17F RNAV, in line with Singapore and Malaysia developer discounts. This offers investors potential 26.7% upside. Key risks include large concentration of earnings on AV City and forex translation risk.

Mapletree Greater China Commercial Trust - Another good quarter

1QFY3/18 results highlights
MAGIC posted a 0.1% yoy rise in 1QFY3/18 DPU to 1.851 Scts on a 4.6% yoy improvement in gross revenue thanks to positive rental reversions and a slight uptick in portfolio occupancy to 98.8%. Results are in line, making up 25.2% of our FY3/18 forecast. NPI margin was relatively stable at c.81% as higher property tax at Gateway Plaza (GP) was offset by lower marketing cost at Festival Walk (FW).  
 
FW benefiting from tenant remixing and good shopper patronage
FW continues to do well with rental revenue up 2.9% yoy to S$61.8m and rental reversion of 9% over previous levels. Tenant sales and shopper footfall rose 2.1% yoy/4.6% yoy due to contributions from two mini-anchors – MUJI and Festival Grand cinema. 80% of FY18 retail expiries have been renewed/leased and the tenant mix has been strengthened with more international and popular brands such as Dr Kong, eGG, LACOSTE and Michael Kors. As such, we anticipate a continued strong showing.
 
GW and SP supported by positive rental reversions
GW posted a slight 1.6% lower NPI due to additional property taxes, partly offset by a 1.9% pts hike in occupancy to 98.8% and 10% positive rental reversions. Contributions from Sandhill Plaza (SP) remained flat as higher achieved rents, thanks to 13% uplift on renewals, were moderated by a dip in occupancy. About 70% of GP and 54% of SP FY18 expiries have been renewed. As such, we expect a stable performance over the coming quarters.
 
No refinancing needs till FY19
In terms of capital management, gearing and effective interest cost held steady qoq at 39.4% and 2.74% respectively. The trust has fixed 76% of its debt cost, mitigating impact of interest rate volatility. With the recent rollover of HK$510m of debt, there are no refinancing needs till FY19. About 58% of the trust’s FY18 distribution income has been hedged into Singapore dollars, giving investors good earnings visibility.
 
Maintain Add
Our FY18-20 DPU estimates are intact. But we update our blended risk free rate assumption from 2.8% to 2%, to closer reflect current levels. Accordingly, our DDM-based target price is raised slightly to S$1.17. We keep our Add call with a potential total return of 12%. We like MAGIC for its exposure to the HK retail sales recovery and resilient performance of FW. Downside risks include slowdown in rental reversion or a decline in occupancy rate.

Frasers Logistics & Industrial Trust - Strengthening its core

Makes first portfolio acquisition
●   FLT has announced the proposed acquisition of seven industrial properties in Australia from sponsor for A$169.3m or 6.4% initial NPI yield. Total acquisition cost including stamp duty and fees is c.A$179.6m. FLT’s maiden acquisition is earlier than we expected, and is a positive surprise. We believe the accretive acquisition couldcatalyse FLT’s unit price, and narrow its valuation gap vs. big-cap industrial S-REITs. The acquisition is expected to be completed in July.
●   We deem the acquisition price tag decent (c.1.2% discount to aggregate independent valuation), and in line with recent market transactions. Although the acquisition’s NPI yield of 6.4% is lower than its existing portfolio yield of c.7%, we note that the properties are underpinned by long-term weighted average lease expiry (WALE) of 9.6 years, and will increase the enlarged portfolio’s WALE from 6.7 years to 6.9 years.
●   The seven properties comprise four completed properties (which were in the ROFR pipeline) and three properties under development. We understand that the properties were negotiated under a willing buyer and willing seller basis, and not because the sponsor initiated a sale. Hence, FLT managed to cherry-pick assets which it believes would enhance the portfolio.
●   Also, we deem that the development properties were acquired under attractive terms. First, the acquisition cost is lower vs. acquiring a completed asset, and the assets are near completion. Second, the developer would bear the construction costs overrun. Third, FLT would receive coupons on initial payment equivalent to the NPI yield during development. Fourth, the properties are fully pre-committed.
 
Manager estimates c.0.9% accretion to pro-forma DPU
●   We maintain our estimates, pending the finalisation of the funding structure, which would be a combination of equity and debt. Based on c.45:55 equity:debt mix, the manager estimates c.0.9% accretion to pro-forma DPU. This could raise our FY18F DPU growth forecast to c.4.4% yoy, which is at the higher-end for industrial S-REITs. The cost of debt to fund the acquisition is likely to be higher vs. the current all-in costs.  
 
Enhancing FLT's core; remains one of our sector's preferred picks
●   We like the quality of the acquisition portfolio. Predominately freehold, four of the properties are located in the state of Victoria, two in New South Wales and one in Queensland. The seven properties are fully-leased or pre-committed, and are 2.4 years old, on average. Leases of the new properties have annual rental step-up of 3.1%, consistent with the existing portfolio’s annual step-up. c.75% of the properties' GRI is underpinned by MNCs and major consumer and logistics industry players.
●   The acquisition would increase FLT's portfolio value by 9.7% to A$1.91bn and will enlarge portfolio GLA by 10.1% to 1.35m sqm. We note that FCL has entered into incentive reimbursement arrangements with FLT for four of the properties.
●   We continue to like FLT for its pure exposure to thefavourable Australian industrial market as well as strong sponsor support. Key downside risk is a turn in the Australia market.

Mapletree Greater China Commercial Trust - FY17: Marginal boost from reversal of VAT payable

One-off boost from reversal of VAT payable 
MAGIC reported a 7.9% yoy rise in 4QFY17 revenue to S$94.8m on the back of higher rental across all three properties and reversal of VAT payable for Gateway Plaza (GW). 4QFY17 DPU of 1.959 Scts was 1.9% higher yoy, accounting for 26% of FY17 forecast. Full-year DPU of 7.32 Scts (+1% yoy) was slightly below expectation at c.98% of our forecast. The trust revalued its properties up by 5.1% yoy, translating to a book NAV of S$1.30/unit.   
  
High portfolio occupancy maintained 
Portfolio occupancy was unchanged at 98.6% as at end-4QFY17, with Festival Walk (FW) and Sandhill Plaza (SP) remaining fully occupied. FW enjoyed a 12% average rental reversion despite lower tenant sales. We believe management would continue to conduct asset enhancement initiatives (AEIs) to drive tenant sales and shopper traffic to enable it to enjoy continued positive rental reversions going forward.   
  
Excluding forex impact, GW revenue delivered growth yoy 
4QFY17 revenue was boosted by a one-off reversal of VAT payable (estimated at S$1.2m per quarter). Although on a full-year basis, GW revenue saw a 3.9% yoy decline to S$79.1m; excluding forex impact in Rmb terms, revenue is a little higher yoy. GW's occupancy was stable at 96.9% with lease reversions re-contracted at 10% higher than preceding levels, the demand coming largely from domestic companies. Sandhill Plaza continues to trade well, with a 16% rental uplift for its expiring leases.   
  
More than one-third of FY18 expiries already locked-in 
Looking ahead, MAGIC has 38% of gross rental income to be renewed in FY18 and a further 23.4% in FY19. An estimated 14% pts of FY18 expiries have already been renewed and extended to FY21/FY22. We expect forward rental uplift to moderate from the present double-digit quantums given the more challenging economic climate. Gearing is healthy at 39.3% as at end-4QFY17. As such, we believe MAGIC continues to explore inorganic growth prospects, largely in China. 
  
Maintain Add 
We lower our FY18F/19F DPU by 2.8/5.1% and introduce our FY20 estimates as we moderate our rental assumption growth for HK and China. We continue to like MAGIC for its largely resilient portfolio, backed by FW. c.65% of its 1HFY18 distribution income has been hedged to S$. Our DDM-based target price rises slightly to S$1.14 as we roll forward our valuation. Maintain Add given the potential total return of 16%. Downside risks include weaker-than-expected Beijing office market, which could affect earnings. 

Mapletree Commercial Trust - Strong performer

4Q/FY17 results came in slightly ahead of our expectations 
MCT reported 4QFY17 DPU of 2.26 Scts, coming in slightly ahead of our projections, representing 12% yoy growth. The better results were supported by a 47% yoy jump in revenue, thanks to the acquisition of MBC1. Additionally, all the properties across the portfolio also reported an improvement in contributions. FY17 DPU of 8.62 Scts exceeded our estimates by 3.4%. The better asset performance led to a 2.2% valuation uplift, with no change in cap rates, translating to a book NAV of S$1.38. 
  
Vivocity continues to perform well 
FY17 gross revenue and NPI from Vivocity rose 5%/3.4% yoy while occupancy remained high at 99%. Shopper traffic grew by a stronger 4.8% yoy to 55.8m while tenant sales crept up 1.3% yoy to S$952m. Retail rents saw a 13.5% upward revision on renewal. Going into FY18-19, MCT has 8.2% and 18% of retail leases to recontract. We expect rent renewals to be more muted, but positive, going forward as the retail climate remains challenging.   
  
Office/business parks component offers stability 
The office/business parks portfolio enjoyed an 8.5% rental uplift on renewals while occupancy at MBC1 and PSA Building held steady at 99% and 98.3%, respectively. Committed occupancy at MLHF rose to 91.6% as part of the vacated space was re-leased. The trust has 4.5% and 7.8% of office leases to be renewed in FY18-19. A lack of new business parks supply should support business park rents. 
  
Strong balance sheet with no near-term refinancing needs 
Its balance sheet remains healthy with gearing dipping slightly to 36.3% with a higher portfolio value. 81.2% of its debt cost has been hedged and there is no refinancing needed until FY19.   
  
Upgrade to Add 
We tweak our FY18-19 DPU up by 0.5-1.6% to adjust for the better-than-expected performance and introduce our FY20 estimates. We raise our DDM-based target price to S$1.70 as we roll forward our projections as well as lower our Singapore discount rate. Upgrade to Add from Hold. We like MCT’s portfolio which has a good blend of resilience (through the more stable business park rents) as well as growth coming from Vivocity. MCT offers total return of c.14%. Risks include slower-than-projected rental uplift.   

Frasers Logistics & Industrial Trust - All shiny and chrome

Largest pure-play exposure to favourable Australian industrial 
FLT is the first S-REIT with an initial pure-play Australian industrial portfolio of A$1.74bn, making it the fourth largest industrial owner in Australia. Its portfolio comprises 54 industrial properties located across the major cities of Melbourne, Sydney, Brisbane, Perth and Adelaide, with an aggregate GLA of 1.23m sqm. 96.9% of its portfolio value is concentrated on the eastern seaboard. Unlike other S-REITs with Australian exposure, FLT has minimised carry trade concerns by funding fully in 100% A$-debt.   
  
Why Australia? 
Australia has sustained 25 years of uninterrupted growth, with domestic consumption emerging as an engine of economic growth. Our economist at Morgans (our Australian JV partner) expects GDP growth to accelerate moderately at 3% for 2017. Rising consumption, e-commerce and internalisation of the retail sector is driving demand for 3PLs and logistics facilities. This has led to favourable supply-demand dynamics where cap rate compression, tightening occupancy and rental growth have been observed. 
  
All shiny and chrome 
FLT has a prime portfolio which ticks all the checkboxes: i) properties which are located in core markets with strong connectivity to key infrastructure, ii) a predominantly freehold/long leasehold and young portfolio, iii) a quality tenant base which accords the trust a high portfolio occupancy of 99.3% and long WALE of 6.9 years with built-in step-ups averaging 3.2% p.a. and lastly, iv) one of the largest Green Star performance rated industrial portfolios in Australia. 
  
Strong sponsor with an established track record 
Unlike the other industrial S-REITs with exposure in Australia, FLT is backed by sponsor FCL, which through FPA, has an end-to-end development platform and is a market leader in Australia’s industrial sector (15-25% market share over 2001-15). In fact, 100% of FLT’s portfolio was developed by FPA. Further, FPA has a development pipeline with an estimated completed value of A$850m, which offers FLT a strategic avenue to pursue inorganic growth, especially with an increasingly low availability of prime assets. 
  
Forecast FY17 DPU of 6.87 Scts; 3.4% yoy DPU growth for FY18 
Factoring in rental step-up of 3.2% p.a. and full-year contributions from the call option and development properties, we project FLT to achieve 6.87 Scts for FY17. We project muted underlying A$-distribution growth as negative rental reversions offset annual step-ups. FLT’s portfolio is slightly over-rented. However, as the A$ is appreciating against the S$, we expect FY18 distributions to be hedged at more favourable rates vs. FY17 distributions, which were hedged pre-Brexit, at an average A$:S$ of 1.0. 
  
Initiate FLT as one of our sector preferred picks 
We initiate FLT with an Add and DDM TP of S$1.10, translating into total returns of 18%, one of the meatiest in our coverage. Given CDREIT’s YTD 10% outperformance (one of the better performing S-REITs), we replace the former with FLT as one of our sector preferred picks (the other being MAGIC). Key downside risk is a turn in Australia’s industrial market. FX risk is mitigated as FLT’s units are traded in both A$ and S$ (the units are fungible), and investors can elect to receive dividends in A$ or S$.

Singapore Post Ltd - Decent ops marred by unfortunate circumstances

Results missed on poorer US operations 
3QFY3/17 core net profit of S$31.4m (+16% qoq, -29% yoy) was a disappointment amid seasonally stronger volumes (Singles Day, Black Friday, Christmas). Revenue fell slightly short of expectations on lower contributions from the ecommerce segment, especially at TradeGlobal (TG). While operating profit at the postal/logistics segments performed in line/exceeded expectations, S$8.4m in operating losses at the ecommerce segment brought overall operating profit down to S$37.3m (-2% qoq, -32% yoy). 
 
Strong AliExpress volumes lifted international mail contributions 
Postal revenue grew 13% qoq and 10% yoy, lifted by higher international mail revenue (+24% qoq, +11% yoy) as SPOST handled more AliExpress shipments, helped by the Singles Day sales event. Postal operating margins rose slightly qoq to 26.9% (2QFY17: 26.2%) on better operating leverage, and operating profit rose 16% qoq to S$38.5m. SPOST continues to engage in conversations with Cainiao, Lazada and Redmart on future collaboration, and plans to increase outbound mail in addition to transshipments. 
 
Logistics saw strong qoq improvement 
We were pleasantly surprised by the improvement in logistics operating profit to S$8.8m, which grew 78% qoq. All businesses saw higher revenue, with overall logistics revenue up 11% qoq and 6% yoy. While startup costs at the new ecommerce logistics hub continue to hurt margins and operating profit was still down 27% yoy, SPOST managed to improve utilisation from 10% to 18% at the facility, partially helped by the peak period. 
 
TradeGlobal missed expectations; risk of impairment but not news 
TG was the key culprit for the group’s poor overall performance. It was expected to post positive profits but instead suffered losses due to: 1) high cost of seasonal fulfillment labour, 2) loss of a key client that filed for bankruptcy and 3) a client that insourced its freight operations. As TG is performing below its base case, it could face impairment in 4Q, which we had highlighted in an earlier note in Jul 2016. We expect cost pressures to ease following a restructuring of TG’s operations. Jagged Peak was profitable in 3Q. 
 
Maintain Add 
We continue to like SPOST for its growth potential in ecommerce logistics following its JV with Alibaba. It also has the potential to divest non-core assets (e.g. self-storage, retail mall). The stock trades at 21x forward P/E, an attractive level for earnings recovery in FY18 following the re-opening of the SPC retail mall in mid-2017. Maintain Add, with a lower DCF-based target price of S$1.62 (7% WACC) as we cut FY17-19 EPS by 6-10% for lower ecommerce profits. Key risk is fierce competition displacing SPOST’s volumes. 

Perennial Real Estate Holdings - Dragged by revaluations and impairment losses

FY16 results highlights  PREH posted FY16 net profit of S$35.1m, -39.6% yoy on a 6.4% dip in revenue to S$110.2m. Although full-year revenue was slightly ahead of our estimate, net profit was below largely due to impairments and revaluation losses taken for the Shenyang Red Star Macalline Furniture Mall and Eden Residences in Singapore, partly offset by revaluation surplus from the Perennial International Health and Medical Hub. Stripping out exceptionals, core net profit would have been S$0.3m, 37% of our forecast.    Singapore impacted by impairments and lower rental income  Singapore made up 54% of FY16 revenue and 16% of EBIT. Revenue fell 4.4% yoy due to lower rental income from TripleOne Somerset on lower occupancy after commencement of AEI. EBIT was adversely impacted by impairment provisions for Eden Singapore and revaluation deficit from Capitol Singapore. PREH recently monetised part of its stake in TripleOne Somerset to Shun Tak and this could create some income vacuum from FY17 onwards.      China earnings growth likely to be 2H loaded  In China, committed occupancy at the Perennial International Health and Medical Hub has crept up to 60% and is scheduled to be operational from 3Q17. In addition, one tower at Chengdu Plot D is expected to be handed over to Chengdu Xiehe Eldercare Home and is expected to commence operations in 3Q17. P1 is expected to have a capacity of 960 beds and pre-marketing activities for these homes have started.    Maintain Add  We think FY17 earnings would likely be back-end loaded with new contributions from Chengdu expected to be felt from 3Q17. Hence, we cut our FY17-18F EPS to factor in the reduced stake in TripleOne Somerset and push out the pace of contributions from Chengdu and Beijing projects as well as delay the sale of the remaining Eden Singapore units. Our RNAV falls to S$1.79, and our TP is cut to S$1.08 (a 40% discount to RNAV). Key risk is slower-than-expected roll-out of its property and healthcare business.