With five properties located in the Harbourfront area including VivoCity, Mapletree Commercial Trust (MCT) is set to benefit from the development of the Greater Southern Waterfront and the rejuvenation of Sentosa Island and Pulau Brani, says UOB Kay Hian analyst Jonathan Koh in his Feb 18 report.
Another re-rating catalyst for the REIT’s share price would be the distribution per unit (DPU) and net asset value (NAV) accretion from the merger with Mapletree North Asia Commercial Trust (MNACT), Koh adds.
MCT and MNACT, on Dec 31, 2021, announced their proposed merger to form a new flagship commercial REIT named Mapletree Pan Asia Commercial Trust (MPACT).
In his report, Koh writes that investors are “overly worried” about MNACT’s anchor asset Festival Walk in Hong Kong, with an “overly pessimistic view” on Festival Walk’s outlook.
See: Reality check: questions posed by SIAS to MNACT and MCT managers and Analysts see strategic positives from MCT and MNACT merger
While the mall experienced mishaps in the form of the Hong Kong protests in November 2019 and the Covid-19 pandemic in 2020 and 2021, Koh sees the current weakness as “an opportune timing” to acquire the property.
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To this end, Koh believes Festival Walk has started to experience a turnaround after two straight years of negative rental reversion.
Furthermore, domestic consumption in Hong Kong has begun to normalise and the reopening of Hong Kong’s border with mainland China is imminent, notes Koh.
In addition, Festival Walk, which has only 25 years left on its land-use right, will be extended by 50 years upon its expiry on June 30, 2047.
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“Articles 120-123 of Basic Law provide the legal basis for renewal of land leases in Hong Kong. Based on a policy statement announced in Jul 1997, new leases of land would be granted a term of 50 years subject to payment of annual land rent equivalent to 3% of the annual rent value of the property,” writes Koh.
“There are many precedents for extension of land leases, the most notable being the extension of land lease for Pok Fu Lam Gardens by 50 years until 2056 in mid-2006. Under the current land lease extension policy, leasees need to apply for “conditions of regrant” two years before the expiry of land leases,” he adds.
The way Koh sees it, MNACT unitholders may vote against the merger with MCT.
“There is a new air of activism in the Singapore stock market. Proxy advisors Institutional Shareholder Services and Glass Lewis have questioned the deal process and unfavourable offer and have advised unitholders to vote against the merger between ESR REIT and ARA LOGOS Logistics Trust,” writes Koh.
“Similarly, activist fund manager Quarz Capital has also complained about the unattractive offer from MCT, which undervalues MNACT at a discount to NAV per unit of $1.27. If the deal is aborted, MCT’s unit price could recover back above $2.00,” he adds.
Koh has kept his DPU forecast for MCT on a standalone basis.
MCT’s unit price has corrected 9% since the proposed merger, whereas MNACT’s unit price has dropped by a smaller 1.8%.
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On a relative basis, MCT has underperformed by 5.5%, while MNACT has outperformed by 1.7% relative to the FTSE all-share S-REIT index, says Koh.
He has kept “buy” on MCT with a target price of $2.48.
In their reports on Jan 27, analysts from Maybank Securities and OCBC Investment Research have also kept “buy”.
Maybank analyst Chua Su Tye has kept his target price unchanged at $2.35, as he expects MCT’s recovery to gain transaction in the coming quarters.
MCT, on Jan 26, reported gross revenue of $374.0 million for the 9MFY2021 ended December, up 7.3% y-o-y. Its net property income (NPI) for the same period was up by 5.6% y-o-y to $291.3 million.
To Chua, the REIT’s results were “operationally in line” with his estimates.
Noting that valuations have pulled back since the announcement of its proposed merger with MNACT, Chua says he continues to see “clear strategic merits of the deal” beyond the strong financial accretion.
“While MCT’s $1.8 billion debt headroom (at 45% limit) offers deal options, we see accelerated growth from a higher $3.8 billion debt capacity and $1.7 billion asset enhancement initiatives (AEI)/ development headroom, upon a successful MNACT merger, as we expect the larger MPACT to embark on more sizeable office acquisitions with its enlarged Pan Asian mandate,” writes Chua.
He adds that he expects MCT’s DPUs to recover in FY2022, following the decline in FY2020/2021 with the capital retention helped by the MBC II deal.
“Rental reversion should decelerate from strong double-digits to 1.5-2% in FY2021 to FY2022 as VivoCity rents catch up with the market. [MCT’s] rents at business park assets [are estimated to] grow at 2% to 3% per annum (p.a.) due to limited supply, and firm demand,” he says.
Upside to MCT’s share price includes an earlier-than-expected pick-up in leasing demand for retail, office and business park space, better-than-expected rental reversions, as well as accretive acquisitions or redevelopment projects.
Meanwhile, downsides include an extended slowdown in economic activity, which could reduce demand for retail, office and business park space resulting in lower occupancy and rental rates. The termination of long-term leases, which may contribute to a weaker portfolio tenant retention rate, and a sharper-than-expected rise in interest rates that could increase the cost of debt, are also downsides.
The research team at OCBC Investment Research (OIR) has lowered its fair value estimate to $2.04 from $2.14.
“Given that MCT’s share price has already declined 8% (as at the close on Jan 26) since it announced its proposed merger with MNACT, we see a more favourable entry point even with our reduced fair value,” writes the team, who sees signs of recovery.
“[We] believe MCT’s strong parentage and healthy balance sheet will allow it to tide over near-term uncertainties, while its strong management team and portfolio are well positioned over the longer-term,” add the team of analysts.
The team had also adjusted its cost of equity (COE) assumption upwards to 6.6% from 6.4% on account of the REIT’s potential into higher risk markets such as China and Hong Kong should its merger with MNACT go through. However, it believes that “this would be partially offset by the strategic benefits of having a larger scale, better trading liquidity and potential increase in its constituent index weight”.
MCT may offer investors a unique exposure to the retail, office and business park sub-sectors in Singapore, this could potentially change given the proposed joint merger with MNACT.
“If successful, the merged entity would become one of the largest REITs by market capitalisation listed in Asia, with a significantly larger scale and platform which is better positioned to unlock upside potential. That said, we believe MCT would gain new exposure to riskier markets and see dilution of its pure-play Singapore status,” writes the team.
Units in MCT closed 1 cent lower or 0.54% down at $1.85, or an FY2022 P/B of 1.1 times and dividend yield of 5.1%, according to OCBC’s estimates.
Photo: MCT
