SINGAPORE (Jan 24): Naysayers who expect Mapletree Commercial Trust (MCT) to be de-rated given the threat of e-commerce hurting earnings at its key asset VivoCity should be made to eat their own words, say analysts.

This is because they have underestimated management’s ability to undertake asset enhancement initiatives (AEIs) to compete against other competing malls as well as online retailers.

According to a Thursday DBS Group Research report, the Temasek-owned mall operator and manager managed to achieve an ROI of over 10% from its recent asset enhancement initiatives (AEIs) and bonus 24,000 sf of GFA obtained by adding a library to the mall.

Completed within a year, the 32,000 sf public library at Level 3 opened in Jan and the GFA expansion — comprising 10 lifestyle and atheleisure brands at Basement 1 — which opened from Jun 2018, should further entrench its positioning as a destination mall.

Looking ahead, DBS expects stronger shopper traffic to support leasing demand.

Lead DBS analyst Mervin Song says as MCT continues to demonstrate its ability to deliver consistent DPU growth and the market prices in the scarcity premium of being one of only two 100% Singapore-focused large cap REITs, he believes MCT will re-rate towards our street high target price of $2.00, which implies a sub-5% yield that is consistent with other premium large cap office and retail REITs.

“We retain our ‘buy’ call on MCT with a revised target price of $2.00... We believe these proactive decisions will underpin the 2% DPU CAGR over the coming three years,” says Song.

To recap, 3Q19 DPU rose 1.3% y-o-y on the back of 2.6% y-o-y revenue growth and 2.2% y-o-y NPI growth.

See: Mapletree Commercial Trust posts 1.3% rise in 3Q DPU to 2.33 cents on higher contribution from VivoCity

Portfolio occupancy jumped q-o-q from 95.9% to 98.1% with stronger occupancies across all properties except for Mapletree Business City I which dropped from 97.8% to 97.5%. VivoCity’s revenue and NPI rose 4.6% y-o-y and 3.9% y-o-y with occupancy at 99.9% as at end-Dec 2018. Rental reversions were maintained momentum at +4.0% compared to +4.1% in 2Q19.

Shopper traffic, however, rose just 1.8% y-o-y, while tenant sales dipped 1.2% y-o-y. Management attributed these to transitory downtime from the tail-end of AEI works and deliberate tenant re-mixing efforts but expecting tenant sales growth momentum to pick up into the coming quarters.

Agreeing, Maybank KimEng says MCT’s better 3Q19 performance came on the back of improved portfolio occupancy and growth momentum at VivoCity on stronger rental outlook after its AEI, given its strengthened destination-mall positioning.

“The broad-based improvement across MCT’s diversified commercial portfolio – on high occupancies and improving rents – support our view of DPU growth levers from potential acquisition/asset swap opportunities, which potentially result in about 9-10% DPU upside to our estimates,” says Maybank analyst Chua Su Tye in a Thursday report.

Maybank is maintaining its “hold” call and $1.60 price target following 3Q19 results coming in line with expectations of house and consensus.

As at 2.31pm, units in MCT are up 3 cents to $1.75, giving it a FY20F dividend yield of 5.3%.