SINGAPORE (Apr 25): CIMB and DBS are reiterating their “add” and “buy” calls on Mapletree Commercial Trust (MCT) with target prices of $1.75 and $1.80, respectively, post the release of the REIT’s 4Q18 results on Tuesday.
To recap, MCT’s manager announced a 4Q DPU of 2.27 cents, which was 0.4% higher than a year ago. The latest set of results brings its DPU for the full year to 9.04 cents, up 4.9% from its DPU of 8.62 cents in FY17.
See: Mapletree Commercial Trust reports 0.4% higher 4Q DPU of 2.27 cents on higher contributions
In a Tuesday report, CIMB lead analyst Lock Mun Yee says she likes MCT for the continued positive performance of VivoCity as it has seen positive reversions, rising tenant rents and gross rental revenue rising 3% on-year over the latest quarter.
In spite of negative rental reversions among the REIT’s office portfolio, she highlights that a further 12.6% of rental income made up of office or business park leases are due to be re-contracted in the financial years ahead – and that the office/business park leases would have achieved a positive reversion over FY18 notwithstanding a pre-termination of space in MBC1.
As such, Lock has tweaked FY19-20 forward DPU estimates up by 1.7-1.9% on expectations of positive renewals for VivoCity to account for 12.6% and 14.2% of rental income for FY19 and FY20, respectively.
The analyst also anticipates upcoming expiries for MCT’s office portfolio to experience a modestly positive uplift when renewed.
While she also likes MCT for its healthy balance sheet and declining gearing due to its higher portfolio value, Lock however remains cautious of the potential for higher interest costs in the years ahead owing to an environment of rising interest rates.
“We expect MCT’s earnings to remain stable, underpinned by improved portfolio occupancy, good performance of VivoCity and new earnings from completion of an ongoing asset enhancement initiative (AEI) at B1 of the mall. Contributions from the office portfolio should improve in the medium term led by the office upcycle. Downside risk could be a continued drag in office and retail rents,” says Lock.
In a separate report on Wednesday, DBS lead analyst Mervin Song says he continues to like MCT for its “best in class” retail and business park assets.
Song thinks MCT’s unit price has the potential to outperform due to its management’s capability to undertake AEIs to partially future-proof its VivoCity mall against competition and the e-commerce space. Despite concerns over rising interest rates, he believes improving office rents and retail sentiment/sales should allay fears of the impact on MCT.
“Evidence of this value-add is 10-29% ROI that will be achieved from recent/upcoming refurbishments as well as the bonus 24,000 sq ft of GFA MCT has obtained by adding a library to the mall. We believe these proactive decisions will underpin the 2% DPU CAGR over the coming two years,” explains the analyst.
He therefore sees the consensus target price of $1.66, which implies a price-to-book value of 1.1 times, as “too low” especially considering how VivoCity is only valued at a cap rate of 4.75% – which is higher than recent transactions at 2.6-4.2% for arguably less dominant malls, in Song’s view.
“We believe as MCT demonstrates its ability to deliver consistent DPU growth, highlighting the quality of its assets, the market will reward MCT with a price-to-book of around 1.2 times as implied by our target price of $1.80 [from $1.75 previously],” says Song.
As at 11:06pm, units in MCT are trading 1 cent lower at $1.59, which is at 1.07 times and 1.09 times book based on CIMB and DBS’s FY19 forward estimates, respectively.
