MCT – DBSV

Southern belle works its rents again

• Full year DPU beat our forecast by c.5%

• Positive rental reversions from VivoCity, and PSAB to be seen next quarter

• Maintain BUY at slightly higher TP of S$1.11

Highlights

Slightly ahead of expectations. 4Q12 gross revenues and NPI was c.10.9% and 16.1% y-o-y higher respectively, largely due to Vivocity’s strong positive rental reversions, as well as the progressive opening of Alexandra Retail Centre (ARC). On a q-o-q basis, NPI also rose by a healthy 6% despite a seasonally-weak quarter on the back of lower property and maintenance expenses. Consequently, 4Q DPU came in at 1.554cts. Full year DPU beat our forecast by c.5%.

Our View

VivoCity exceeded expectations. Monthly rents are now at S$10.62, which is above the earlier forecast of $10.40 psf. Rental uplift for the year was 24.9% and retention rate at a high of 92.1%. Negotiations for its FY12/13 leases (33.4% of its revenue) have begun and management has indicated that there is healthy interest amongst tenants. Most of these leases will expire in 2H and are largely specialty shops. As these leases were likely signed in 2009, at the trough of the retail market, so assuming a typical three-year lease term, we expect the trust to see healthy positive rental reversions, supported by high shopper traffic (+15.5% y-o-y) and tenant sales (+8.7% y-o-y). Meanwhile, occupancy costs remain healthy at 15.8%

More to come. ARC has been opening up, progressively from 15 December, 2011 and has reached a committed occupancy rate of 57.1%. PSAB has also completed its asset enhancement work, and the incremental 15k of office space has already been leased out. We should see a higher contribution from this asset going forward. Meanwhile rents for the offices continued to trend up nicely by 8.6%yoy on the back of higher occupancy (98.2%).

Balance sheet remains healthy. Gearing dipped marginally to 37.6% with no major refinancing in FY12. Average cost of borrowings remains low at 1.96%

Recommendation

Maintain BUY. We continue to like MCT for its proactive leasing strategy and its ability to drive rental renewals. We have nudged TP up by 1.8% to S$1.11 to account for its better-than-expected performance at VivoCity. FY13/14 yields are at 6.8/7.2 % and our revised TP of S$1.11 offers a total upside of close to 30%.