MMP – OCBC
A laggard play
Flattish growth. Macquarie MEAG Prime REIT’s (MMP) 4Q06 came in within expectation. Top-line came in at S$22.6m, improving 1% QoQ, with NPI (Net Property Income) at S$17.2m (-1% QoQ). However, distributable income per unit (DPU) was better at 1.47 cents, improving 2% QoQ. The lower NPI was attributed to higher property expenses (mainly depreciation) as the result of the installation of escalators linking Wisma Atria basement to Orchard road. This is a non-tax item and is distributed back to unitholders, hence the higher DPU.
Organic growth to come from office. Presently, MMP’s retail space enjoys fairly high rentals and will see very little space up for renewal in 2007. So we do not anticipate this segment to be the growth driver. However, on the office segment we expect about 182,000 sq ft (about 70% of office space) of leases to come up for renewal over the next 2 years. More importantly, these expiring leases have a rental rates averaging at only about S$5 psf/mth, whilst present market rates are closer to S$8 psf/mth. So we can expect about a 60% rise in rates for these spaces. This higher rate in turn will translate to an increase in revenue of about S$3.0m p.a. over the next 2 years. In light of the good reversions, we have adjusted our FY07 and FY08 DPU forecasts from 5.90 cents and 6.02 cents to 6.12 cents and 6.37 cents respectively.
Where are the acquisitions? In so far as acquisition is concerned, MMP has been fairly disappointing. In the current results announcement again, there was no news of potential acquisitions. Relative to all its S-REITs peers, MMP stands out as one of the few REITs not to have bought anything since IPO. On a positive note, MMP has recently beefed up its investment team and is targeting acquisitions in China, Japan, Malaysia and Singapore. We remain hopeful of some positive developments soon.
Maintain Buy with higher revised fair value. Since our valuation upgrade in December, MMP has done exceedingly well, rising by about 17% over the last month. However, even at present trading range, its price to book of about 1.0 times remains very low relative to its peers’ P/B of 1.4-1.8 times. We thus remain positive on MMP and see it as one of the lowest-risk REITs with low expectation of growth. We see these traits as defensive and thus maintain our BUY rating and with a revised fair value of S$1.32 (from S$1.22) on the back of higher office valuations.