MMP – DBS

Stable retail growth

Consistent distribution backed by resilient rents. MMP has been consistently delivering distributions of 1.44 cents per unit quarterly. Management has dispelled concerns of the tunnel closure on basement retail rents as basement space leases are still being transacted at above S$60 levels.

Competition not an issue. New malls such as Orchard Turn, Orchard Central and Somerset Central are coming up, bringing on additional 1.2m sf of retail supply by FY09, yet there is still room to grow for retail stock in Singapore. With retail space per capita of about 7 sf, Singapore trails behind HK’s 11 sf and Japan’s 12 sf, according to Knight Frank.

Revaluation expected on the back of strong physical market. Office space in Orchard Road is enjoying positive spillover demand from tight office vacancy in prime office space at about 2.7% currently. MMP is already looking at S$8 rentals for some of its office space. With about 16% of MMP’s assets exposed to office, upward revaluation is likely given that its office portfolio is currently only valued at 900 psf. Upward revaluation will potentially enhance debt capacity and NAV.

Is the wait finally over? MMP has been lagging behind other REITs in terms of acquisitions since listing in Sept 05. Management is targeting to deliver an acquisition by 1H07, after which a certain degree of yield compression may set in. Currently MMP is trading at 5% yield compared to retail S-REITs trading at 4%.

Maintain BUY, TP S$1.29. Forward yield of 5% is supported by limited downside from retail rents from the two prime retail assets in Orchard Road. With prime retail rents growing by 4.5% in FY06, we expect retail rents to continue rising for the next three years. We have raised our retail rental growth assumptions from 2% to 5% for FY07 to FY09 and DPU estimates in the range of 3.6%-4.6%. Therefore we have accordingly raised our DCF derived target price of S$1.29. Maintain Buy.